When green turns brown: Green premium revisited

• We examine green premium in Australia's market dominated by carbon-intensive industries. • ESG ratings in Australia conflate firm characteristics with environmental performance. • Controlling for firm characteristics and industry composition reveals brown stock outperformance. We investigate the green premium in Australia’s equity market. Using 13 years’ worth of data from 2010 to 2023, we find an initial cumulative 118 percent green premium over our sample period (9.1 percent annually), which reduces to only 30 percent (2.3 percent annually) after orthogonalizing greenness scores for firm characteristics. Asset pricing tests suggest the green premium in Australia is largely explained by known risk factors. Critically, excluding carbon-intensive industries and using orthogonalized greenness scores reveals a "brownium" – brown stocks have outperformed the green stocks cumulatively by 47 percent over our sample period (3.6 percent annually). Our results demonstrate that environmental risk pricing requires careful consideration to separate confounding firm characteristics from ESG ratings which determine whether firms are classified as green or brown, with implications for ESG investing in economies with high concentration of carbon-intensive industries.