Green economy and stock market returns: Evidence from European stock markets

Abstract

Green economy is the way forward to achieve economic, social and environmental, sustainable development. However, to accelerate the transition to green economy, private sector companies need to understand the impact of imposing green polices and activities on the economy. Therefore, this paper examines the impact of green growth on future aggregate stock market returns on European stock exchanges. Using fixed effects model, the results show that green growth policies result in lower future aggregate stock market returns consistent with the investors’ perceived reduction in risk argument. The findings of this paper enhance our understanding of how transition to a more sustainable green economy could impact the aggregate return of financial markets. The results remain unchanged after estimating standard errors clustered by country, by year and by both country and year. However desirable it is to adopt a green economy, it is important to implement the right measures to support it sensitively, without imposing heavy costs that severely affect economic health.