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Green Expectations: Climate Change and Homeowner Valuation of Dwelling Sustainability

Milind Goel (solo authored)

I compile seven million residential real estate transactions in the United Kingdom and recover discount rates used by homeowners to value dwelling sustainability. To do this, I calibrate the present value of energy savings from subsequent improvements in dwelling sustainability to the observed price premium. I show that homeowners accept lower returns for greener dwellings, evidenced by the declining structure of discount rates with increasing dwelling sustainability. Moreover, I exploit the spatial, temporal, tenurial, and vintage variation in premium to demonstrate that homeowners price sustainability following economic principles. My estimates provide direct measures for rates used to discount climate investments.

Keywords: climate finance, discount rates, green premium, household finance

Homeowners accept lower returns for greener dwellings

The figure reports the marginal net discount rates obtained from our model using a stippled black line. The y-axis corresponds to the marginal rate that homeowners use to discount energy savings obtained from a unit improvement in the sustainability rating of a dwelling with an initial rating corresponding to the x-axis. The aggregate marginal discount rate associated with a dwelling rated 40 is 6.97%, decreasing monotonically to 3.79% for a dwelling rated 80. The preference heterogeneity shows that homeowners pay an excess premium for greener dwellings. I term this difference the green premium, which can be interpreted as the utility that homeowners derive from dwelling sustainability.

I interpret the energy savings (Δu) from marginal improvements in sustainability ratings as dividends, growing at the same rate (g) as energy prices. Discounting these dividends at a constant rate for dwellings traded under a perpetual ownership covenant enables me to apply the Gordon (1982) growth model for infinitely lived assets. My approach is motivated by Giglio, Maggiori, and Stroebel (2015), who model the prices of dwellings traded under perpetual ownership covenants as the present value of an infinite sequence of rental cash flows. I condition the model on sustainability ratings of dwellings to measure the marginal preference corresponding to each unit rating improvement. This enables me to capture the concavity in marginal energy savings that result from subsequent rating improvements. I recover the marginal net discount rates by computing expected marginal energy savings using my compiled data and calibrating their present value to the premium (Δp) associated with dwelling sustainability.

Conferences

Society of Finance Studies (SFS) Cavalcade
Northern Finance Association (NFA) Annual Meeting (upcoming)
ESG Conference at Cornell SC Johnson College of Business
Business Schools for Climate Leadership Conference at IESE Business School
Ageing and Sustainable Finance Conference by Leibniz-Centre for European Economic Research
Finance Forum organised by the Spanish Finance Association
INFORMS Annual Meeting
Trans-Atlantic Doctoral Conference at the London Business School

Manuscript (SSRN) ➔

Legislator Tweets About the Green Transition and the Returns of Green versus Brown Stocks

Victor DeMiguel, Javier Gil-Bazo and Milind Goel

To study the impact of green-transition regulation on firm value, we analyze stock returns around legislator tweets about climate change. Green stocks significantly outperform brown stocks in the one-to-ten-minute window around pro-transition tweets. The cumulative daily-average green-minus-brown portfolio return around pro-transition tweets is 6.9% higher than around anti-transition ones. For tweets that mention environmental regulations, the spread increases in the weeks preceding a congressional vote and is larger before close votes and when Congress is split. Our findings suggest that the green transition impacts the relative performance of green and brown stocks, at least partly, via a regulatory channel.

Keywords: climate change, transition regulation, social media, high-frequency identification

Average daily GMB spread around a tweet accumulates to 6.9%

We find that green stocks significantly outperform brown stocks in the one-to-ten-minute window around pro-transition tweets. The spread between green and brown stock returns around tweets is economically meaninful. The figure above depicts the resulting cumulative daily-average returns of a value-weighted green-minus-brown portfolio around pro-transition tweets (purple line) and around anti-transition tweets (yellow line). The aggregate green-minus-brown portfolio return accumulates to 1.5% around pro-transition tweets and -5.4% around anti-transition tweets. This 6.9% spread is economically significant because we effectively accumulate the returns around a single tweet on each of the 2,270 trading days in our sample.

We examine the prices of the thousand largest US stocks in the one-to-ten-minute window around legislator tweets related to climate change. Around each tweet, stocks are sorted into green, grey, and brown portfolios based on their carbon emissions. Next, we use large language models (LLMs) to obtain the legislator tweet-sentiment towards the green transition. We then test the hypothesis that an increase (or decrease) in the legislator sentiment towards green transition has a differential impact on the prices of green versus brown stocks. The identifying assumption is that no other information is released over such a short window around the tweet that systematically affects the prices of green and brown stocks.

Presentations

Asset Pricing and Machine Learning Conference at Gothenburg University
Conference in Sustainable Finance at University of Luxembourg (upcoming)
INFORMS Annual Meeting
WHU Otto Beisheim School of Management*
ESCP Business School*
Workshop on Unstructured Data and Language Models at the Michigan Ross School of Business*
ESG Workshop at Toulouse Business School*
Spring Workshop at ESADE*
Dauphine University*
Frankfurt School of Finance and Management*
(* coauthor)

Green Premium

Environmental Tweets

Green Expectations: Climate Change and Homeowner Valuation of Dwelling Sustainability

Milind Goel (solo authored)

Keywords: climate finance, discount rates, green premium, household finance

Homeowners accept lower returns for greener dwellings

Conferences

Society of Finance Studies (SFS) Cavalcade

Northern Finance Association (NFA) Annual Meeting (upcoming)

ESG Conference at Cornell SC Johnson College of Business

​Business Schools for Climate Leadership Conference at IESE Business School

Ageing and Sustainable Finance Conference by Leibniz-Centre for European Economic Research

Finance Forum organised by the Spanish Finance Association

INFORMS Annual Meeting

Trans-Atlantic Doctoral Conference at the London Business School

Legislator Tweets About the Green Transition and the Returns of Green versus Brown Stocks

Victor DeMiguel, Javier Gil-Bazo and Milind Goel

Keywords: climate change, transition regulation, social media, high-frequency identification

Average daily GMB spread around a tweet accumulates to 6.9%

Presentations

Asset Pricing and Machine Learning Conference at Gothenburg University

Conference in Sustainable Finance at University of Luxembourg (upcoming)

INFORMS Annual Meeting

WHU Otto Beisheim School of Management*

ESCP Business School*

Workshop on Unstructured Data and Language Models at the Michigan Ross School of Business*

ESG Workshop at Toulouse Business School*

Spring Workshop at ESADE*

Dauphine University*

Frankfurt School of Finance and Management* (* coauthor)

Business Schools for Climate Leadership Conference at IESE Business School

Frankfurt School of Finance and Management*
(* coauthor)