Do Investors Care about Carbon Risk?
67 Pages Posted: 11 Jun 2019 Last revised: 18 Jul 2019
Date Written: July 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 emission intensity 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. There is a striking and robust difference in the carbon premia for direct (scope 1 & 2) emissions and indirect (scope 3) emissions. While the former can be explained by industry factors, the latter cannot. We also find that institutional investors implement exclusionary screening based on scope 1 & 2 but not scope 3 emissions. These results are consistent with an explanation based on local thinking or sparse modeling of carbon emissions. Although investors do appear to be aware of risks associated with carbon emissions, they do not precisely map the source of these risks across industries and firms.
Keywords: carbon risk, cross section of stock returns, divestment, institutional ownership
JEL Classification: Q54, G12, G18
Suggested Citation: Suggested Citation