71 Pages Posted: 10 Mar 2017
Date Written: March 30, 2017
Using comprehensive information on CO2 emissions and environmental agenda of over 2,100 global firms we introduce a common capital market-based carbon risk factor. This factor is important as it captures firms’ sensitivity to the worldwide transformation to a green, low-carbon economy. We find a significant “green premium” for firms which are prepared for the transformation, respectively a “carbon penalty” for those who are not. Our factor significantly enhances the explanatory power of common factor models out-of-sample for global, US, European and Asian firms. It thus allows firms, investors and regulators to measure carbon risk without environmental information.
Keywords: Carbon risk, green finance, economic transformation, climate change, stock prices
JEL Classification: G12, G31
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