The Emerging Importance of Carbon Emission-Intensities and Scope 3 (Supply Chain) Emissions in Equity Returns

Abstract

ET Index Research has investigated the relationship between equity returns and carbon intensity. The results indicated that portfolios of low-carbon intensity stocks have outperformed portfolios of high-carbon intensity stocks, and that this outperformance is significant. This relationship is found to persist after controlling for other known risk factors. We find that using Scope 3 emission intensities leads to the greatest outperformance of low carbon intensity over high-carbon intensity portfolios. As the quality of Scope 3 emissions data continues to improve, along with increasing environmental pressure on companies, ET Index Research will continue to monitor how the relationship between carbon intensities and stock returns continues to develop.

Keywords: Carbon Emissions, Greenhouse Gas Emissions, Equity Returns, Risk Premia, Risk Factors