Author Details

Guillermo Cano

Guillermo Cano
Executive Director, MSCI Research

Gaurav Trivedi

Gaurav Trivedi
Vice President, MSCI Research

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Is There a Green-to-Brown Premium?

  • From December 2013 to May 2020, “green” companies performed approximately in line with the MSCI ACWI Investable Market Index (IMI), while “brown” companies underperformed the index.
  • Over a shorter period, from September 2018 to May 2020, green companies outperformed the MSCI ACWI IMI, and brown companies once again underperformed.
  • While any “green-to-brown premium” was mainly driven by the underperformance of brown companies over the entire analysis period, a transition to a low-carbon economy may, in the long run, favor green companies and place brown companies at a disadvantage.

As institutional investors evaluate possible reallocation of capital around the global transition toward a low-carbon future, we analyzed the characteristics and performance of “green” companies (alternative energy, energy efficiency and other clean technologies) versus “brown” companies (oil & gas exploration and production, thermal coal mining and fossil-fuel power generation). Was there evidence of a “green-to-brown premium”1 caused by a shift in capital flowing out of brown companies and into green ones? Or, did oil prices explain the difference in performance between green and brown companies?

Well-known measures such as the “green-to-brown ratio,” which compares revenues from green companies versus revenues from brown companies, have been used prospectively to measure the shift from green to brown activities. In this analysis, we turned instead to the performance of these companies’ stocks. Specifically, we measured a potential green-to-brown premium by dividing the value of a green index by the value of a hypothetical brown index monthly from December 2013 to May 2020.


Defining Our Study’s Green and Brown Indexes

While historically there has been no industry standard definition of “green” and “brown” activities, investors are getting guidance from the emerging EU taxonomy of sustainable economic activities.2 The MSCI Global Environment Index3 is aligned with the core principles presented by the EU Technical Expert Group on Sustainable Finance’s “Taxonomy Report: Technical Annex.”4 We use this as our “green index.”

The MSCI Global Environment Index consists of companies from the MSCI ACWI IMI with at least 50% revenue from alternative energy, energy efficiency, green building, pollution prevention and/or sustainable water. We construct our “brown index” using similar guidance from the EU report and select companies in the MSCI ACWI IMI with at least 50% revenue from thermal coal mining, generation of power from fossil fuels and/or extraction and production of conventional and unconventional oil and gas. Each hypothetical market-cap-weighted index was rebalanced on a quarterly basis.5

As of December 2013, the green and brown indexes held approximately 160 stocks, and as of May 2020, the green index included 216 companies, while the brown had 208. It’s notable in terms of the global “green” transition that, while the number of companies ended in a similar place, the green index reached 200 stocks around four years earlier than the brown index.


Green vs. Brown Across Market Cap and Sub-Industry

While the median market cap of MSCI ACWI IMI companies stayed relatively flat over our assessment period, we saw some growth in median market cap for constituents of the green index and a decline for those of the brown index. The exhibit below shows that, since May 2019, the median market cap of the green index’s constituents surpassed those of the brown index, and the trend has continued year to date. There are many possible reasons for this trend, but we note that the number of institutional investors pledged to divest from fossil fuel surpassed 1,000 in late 20186 — and is expected to grow in the coming years.7


Green Index’s Median Market Cap Increased as Brown Index’s Decreased

And what types of companies were in each index? The constituents of the green index were spread across various Global Industry Classification Standard (GICS®) sub-industries8 in the industrials, consumer discretionary, real estate and information technology sectors. As with many areas of investing, this diversity may have benefited the green index. And this variety contrasts with the brown index, where most of the constituents were from only five sub-industries in the energy and utilities sectors.


Most Brown-Index Companies Were in the Energy and Utilities Sectors

Green and Brown Indexes’ Performance Relative to the Benchmark and Oil Prices

Over our analysis period, the green index performed approximately in line with the market, with an annualized active return of -0.3%, compared to the brown index’s active return of -16.2%. The price of oil, meanwhile, fell by 17.4% on an annualized basis. Based on this analysis, it would be easy to conclude that the green index behaved like the market, while the brown index mainly reflected the price of oil. A closer look within this time frame, however, provides additional insights.


Annualized Active Return of Green and Brown Indexes (vs. MSCI ACWI IMI) and Oil Prices


Contributors of Active Return for Green and Brown Indexes (vs. MSCI ACWI IMI) and Oil Prices

Dec 2013 - Sep 2018
Sep 2018 - May 2020
Source of Return Green Cap
Weight Index
Brown Cap
Weight Index
Green Cap
Weight Index
Brown Cap
Weight Index
Total active
Dec 2013 - Sep 2018
Sep 2018 - May 2020
Oil Price/ barrel


From December 2013 through September 2018, we saw that stock-specific effects were the greatest return detractor for the green index, while industries and style factors were the greatest return detractors for the brown index. During the period from September 2018 through May 2020, stock-specific contribution increased to 8.5% for the green index and -4.5% for the brown index — which could indicate that selecting green or brown stocks started becoming more relevant. We estimate that the green index’s upward momentum may have been spurred by global events, including:

  • Introduction of more than 70 climate-related regulations and initiatives by governments, industry and financial institutions9,10
  • Economic and market events such as falling prices of clean technologies,11 international strikes and public protests for action against climate change12 and increased efforts of major energy-importing nations to secure greater energy independence and take steps toward a low-carbon transition13

The green-to-brown-market-cap index ratio grew 17.8% annually from December 2013 through May 2020. We note, however, that the growth in the index ratio accelerated starting around September 2018. This acceleration came, in part, as the green index outperformed the MSCI ACWI IMI by 7.9% from September 2018 through May 2020.


Green-to-Brown Market-Cap Index Ratio Accelerated Starting in September 2018


Will Green Keep Growing and Brown Keep Declining?

Over the entire analysis period the green-to-brown premium was mainly driven by the underperformance of brown companies; but starting in September 2018, the premium seemed to accelerate as green companies outperformed the MSCI ACWI IMI. We observed it was driven almost as much by stock-specific effects (13%) as by industry (e.g., oil) effects (18%), in opposition to what we had witnessed in the preceding five years. While the past is not necessarily indicative of the future, there are several factors — such as market pricing of renewables, government regulations, investor pressure and consumer and industrial demand — that will play a key role and may support this trend in the longer term.

Whether we call this trend the green-to-brown premium, “brown/divestment discount,” “oil-price effect,” “transition bonus” or any other moniker — post-COVID-19, there is potential for global shifts in capital as countries transition to a low-carbon economy.14



1For purposes of our analysis, a green-to-brown premium consists of the green index outperforming the MSCI ACWI IMI while the brown index underperforms it.

2“TEG Final Report on Climate Benchmarks and Benchmarks’ ESG Disclosures.” EU Technical Expert Group on Sustainable Finance, September 2019.

3For detailed methodology, see: “MSCI Global Environment Index Methodology.” February 2020.

4“Taxonomy Report: Technical Annex.” EU Technical Expert Group on Sustainable Finance, March 2020.

5For our analysis we also constructed equal-weighted versions of the green and brown indexes and found similar results to the market-cap-weighted versions.

6Carrington, D. “Fossil fuel divestment funds rise to $6tn.” Guardian, Sept. 10, 2018.

7“The Fossil Fuel Industry Will Probably Collapse This Decade.” RHS Financial, Feb. 12, 2020.

8GICS is the global industry classification standard jointly developed by MSCI and Standard & Poor’s.

9“2019 Status Report,” Task Force on Climate-related Financial Disclosures,” June 2019.

10“Over 100 firms, local governments and private groups in Japan unite against climate change.” Japan Times, July 6, 2018.

11“Solar vs. Coal: Why the ’74 Percent Report’ Signals a New Era for US Energy.” Inverse, March 28, 2019.

12“Protesting Climate Change, Young People Take to Streets in a Global Strike.” New York Times, Sept. 20, 2019.

13“Climate Change Performance Index.” NewClimate Institute, Germanwatch and CAN, Dec. 10, 2019.

14Trankmann, B. “The growing urgency of shifting to a low carbon economy.” United Nations Development Programme, May 29, 2020.



Further Reading

MSCI Climate Solutions

MSCI Climate Change Indexes

MSCI Low Carbon Indexes

Is There a Green Factor?

Have corporate green bonds offered lower yields?

How Funds Are Positioned for a Low-Carbon Future