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

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