Performance of energy ETFs and climate risks

We investigate whether green (brown) portfolios constructed from clean energy ETFs (fossil fuel ETFs) yield positive (negative) returns conditional on climate-related risks. While the green portfolios do not unconditionally outperform the brown ones, the outperformance of green portfolios is statistically significant under the conditional setting using non-parametric estimates with imposing inequality restrictions. Our conditional studies also show that brown portfolios are riskier than green ones with various measurements. We present the heterogeneity in the effect of climate information on the return and risk of green and brown portfolios. Furthermore, we document that fund flows for green assets are higher than those for brown ones during periods of high climate risks. Our findings are robust to alternative specifications. • We study return performances and risks of energy portfolios under the conditional setting. • We demonstrate opposite results compared to unconditional studies which are used in existing literature. • Specifically, we report that the green portfolio outperforms the brown one; the brown portfolio is risker than the green one, in particular, the brown portfolio has higher downside market semibeta, which are not found if relying on unconditional tests. • We find that fund flows of green assets are higher than that for brown ones. • Our results are robust to economic cycles and alternative specifications.