Do Investors Care about Carbon Risk?

67 Pages Posted: 11 Jun 2019 Last revised: 18 Jul 2019

See all articles by Patrick Bolton

Patrick Bolton

Columbia Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)

Date Written: July 16, 2019

Abstract

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

Bolton, Patrick and Kacperczyk, Marcin T., Do Investors Care about Carbon Risk? (July 16, 2019). Available at SSRN: https://ssrn.com/abstract=3398441 or http://dx.doi.org/10.2139/ssrn.3398441

Patrick Bolton (Contact Author)

Columbia Business School - Department of Economics ( email )

420 West 118th Street
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/pbolton/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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