Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Carbon Emission Intensity and Stock Returns

Stanford Global Project Center Working Paper

Posted: 21 Aug 2017 Last revised: 7 Sep 2023

See all articles by Soh Young In

Soh Young In

Korea Advanced Institute of Science & Technology (KAIST); Stanford University - School of Engineering

Ki Young Park

Yonsei University

Ashby Monk

Stanford University

Date Written: April 16, 2019

Abstract

This study examines the relationship between returns and risks in low-carbon investing, with a particular focus on how financial markets evaluate a firm’s carbon management performance. Using a dataset of 120,050 observations from 1,715 U.S. companies for the period between January 2005 and December 2018, we construct a portfolio termed “Efficient-Minus-Inefficient” (EMI), based on firm-level carbon emission intensity (revenue-adjusted carbon emissions) as well as other characteristics such as size and book-to-market ratio. The EMI portfolio mimics an investment strategy that favors long positions in carbon-efficient firms and short positions in carbon-inefficient firms. Our analysis reveals that, since 2009, the EMI portfolio has generated positive and statistically significant abnormal returns, ranging from 3.4% to 5.4% annually (excluding smaller market cap firms). Notably, the positive alpha of the EMI portfolio comes from the outperformance of carbon-efficient firms, not from the underperformance of carbon-inefficient ones. Moreover, these findings remain robust even when accounting for industry-specific factors and other macroeconomic conditions, including fluctuations in oil prices and shifts in investor preferences due to the low-interest-rate environment following the 2008 financial crisis.

Keywords: corporate environmental sustainability; corporate carbon management; carbon intensity; portfolio management; low-carbon investing; multi-factor asset pricing model; carbon efficient-minus- inefficient (EMI) portfolio

JEL Classification: G12, G30, P18

Suggested Citation

In, Soh Young and Park, Ki Young and Monk, Ashby, Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Carbon Emission Intensity and Stock Returns (April 16, 2019). Stanford Global Project Center Working Paper, Available at SSRN: https://ssrn.com/abstract=3020304

Soh Young In (Contact Author)

Korea Advanced Institute of Science & Technology (KAIST) ( email )

291 Daehak-ro, Yuseong-gu
Daejeon, 34141
Korea, Republic of (South Korea)

Stanford University - School of Engineering ( email )

Stanford, CA 94305-9025
United States

Ki Young Park

Yonsei University ( email )

Yonsei University
Seoul
Korea, Republic of (South Korea)

Ashby Monk

Stanford University ( email )

United States

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