Carbon Risk

78 Pages Posted: 10 Mar 2017 Last revised: 19 Aug 2020

See all articles by Maximilian Görgen

Maximilian Görgen

University of Augsburg

Andrea Jacob

University of Augsburg

Martin Nerlinger

University of St. Gallen - School of Finance

Ryan Riordan

Queen's University - Smith School of Business

Martin Rohleder

University of Augsburg

Marco Wilkens

University of Augsburg

Date Written: August 10, 2020

Abstract

We investigate carbon risk in global equity prices. We develop a measure of carbon risk using industry standard databases and study return differences between brown and green firms. We observe two opposing effects: Brown firms are associated with higher average returns, while decreases in the greenness of firms are associated with lower announcement returns. We construct a carbon risk factor-mimicking portfolio to understand carbon risk through the lens of a factor-based asset pricing model. While carbon risk explains systematic return variation well, we do not find evidence of a carbon risk premium. We show that this may be the case because of: (1) the opposing price movements of brown firms and firms becoming greener, and (2) that carbon risk is associated with unpriced cash-flow changes rather than priced discount-rate changes. We extend our analysis to different geographic regions and time periods to confirm the missing risk premium.

Keywords: Carbon risk, climate finance, climate change, economic transition, asset pricing

JEL Classification: G12, G15, Q51, Q54

Suggested Citation

Görgen, Maximilian and Jacob, Andrea and Nerlinger, Martin and Riordan, Ryan and Rohleder, Martin and Wilkens, Marco, Carbon Risk (August 10, 2020). Available at SSRN: https://ssrn.com/abstract=2930897 or http://dx.doi.org/10.2139/ssrn.2930897

Maximilian Görgen

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Andrea Jacob

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Martin Nerlinger

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St. Gallen, 9000
Switzerland

Ryan Riordan

Queen's University - Smith School of Business ( email )

Smith School of Business, Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Martin Rohleder

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4120 (Phone)

Marco Wilkens (Contact Author)

University of Augsburg ( email )

Universitaetsstr. 16
Augsburg, 86159
Germany
+49 821 598 4124 (Phone)
+49 821 598 4223 (Fax)

HOME PAGE: http://www.wiwi.uni-augsburg.de/bwl/wilkens/team/wilkens_marco/

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