67 Pages Posted: 10 Mar 2017 Last revised: 21 Jan 2020
Date Written: December 16, 2019
We investigate the role of carbon risk in global equity prices. High carbon risk firms (brown) are associated with higher returns and unexpected increases in carbon risk are associated with lower returns. We show that green firms are becoming greener faster than brown firms confounding asset pricing tests that use long-short portfolios. Additionally, we show that green and brown firm risk is better explained by unpriced re-evaluations of firm cash flows than by priced discount-rate changes, leading to a missing carbon risk premium. We extend our analysis to different geographic regions and time periods and confirm the missing risk premium.
Keywords: Carbon risk, climate finance, climate change, economic transition, asset pricing
JEL Classification: G12, G15, Q51, Q54
Suggested Citation: Suggested Citation