Are Carbon Emissions Associated with Stock Returns?

Abstract

An influential emerging literature documents strong correlations between emissions and both stock returns and operating performance. We reexamine that data and conclude that these associations are driven by three factors. First, unscaled emissions, the variable typically used in academic literature, is correlated with stock returns but emissions intensity (emissions scaled by firm size), a more commonly-used measure in practice, is not. Second, stock returns are correlated only with unscaled emissions estimated by the data vendor, but not with unscaled emissions actually disclosed by firms. Vendor-estimated emissions systematically differ from firm-disclosed emissions and are highly correlated with financial measures such as sales, suggesting that prior inferences merely capture the well-known association between returns and operating performance. Consistent with this assertion, the associations between emissions and returns disappear after accounting for firm size, industry clustering, and vendor estimation. Investors might want to be cautious about assuming emissions are priced by equity markets.

Keywords: Carbon Emissions, Stock Returns, Operating Performance, Trucost, Estimated Emissions

JEL Classification: M14, G23, G34