Do Investors Care about Carbon Risk?
91 Pages Posted: 11 Jun 2019 Last revised: 20 Nov 2020
Date Written: October 30, 2020
We study whether carbon emissions affect the cross-section of U.S. stock returns. We find that stocks of firms with higher total CO2 emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. 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 direct emission intensity (the ratio of total emissions to sales) in a few salient industries. Overall, our results are consistent with an interpretation that investors are already demanding compensation for their exposure to carbon emission risk.
Keywords: Carbon Emissions, Climate Change, Stock Returns, Institutional Investors
JEL Classification: G12, G23, G30, D62
Suggested Citation: Suggested Citation