European environmental policy and climate benchmarks: What happens to my money?

Climate change raised the interest in how the regulatory policy affects investor portfolios. The aim of this study is to analyze whether a new policy framework, that is the new European Climate Benchmark, negatively impacts the risk-return performance when investments are directed into stocks with specific emission-oriented criteria. By using a dataset of company Emission Score and recursive portfolio methodology, this article analyses the performance of High and Low Emission Stocks in European region. The study focuses on stocks listed on the Eurostoxx600 Benchmark, during the period 2006-2020. By implementing a variety of portfolio screens, our analysis provides the following insights. First, active selection of high-rated stocks does not provide inferior performance in comparison to low-rated stocks. Second, investors preferring stocks with low carbon footprints (good portfolio) and high carbon footprints (bad portfolio) still observe a performance similar to the broad market in terms of overall riskiness, while showing a U-shaped relationship between riskiness and Emission level. Moreover, investing in best Emission score stocks led investors to greater overall returns in the most turmoil periods, providing the insurance-like protection attribute associated with ethical investments. Therefore, there is no incompatibility between pursuing higher sustainable values as well as greater financial performances from investments.