Do Investors Care about Carbon Risk?
77 Pages Posted: 11 Jun 2019 Last revised: 18 Oct 2019
Date Written: October 16, 2019
This paper explores whether carbon emissions affect the cross-section of U.S. stock returns. We find that stocks of firms with higher CO2 emissions earn higher returns, after controlling for size, book-to-market, momentum, and other factors that predict returns. We cannot explain this carbon premium through differences in unexpected profitability or other known risk factors. We also find that institutional investors implement exclusionary screening based on scope 1 emissions in a few salient industries. These results are consistent with an interpretation that investors are demanding compensation for their exposure to carbon risk.
Keywords: carbon risk, cross section of stock returns, divestment, institutional ownership
JEL Classification: Q54, G12, G18
Suggested Citation: Suggested Citation