Are Carbon Emissions Associated with Stock Returns?

Abstract

An influential emerging literature documents strong correlations between emissions and stock returns. We reexamine that data and conclude that these associations are driven by two factors. First, 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 fundamentals, suggesting that prior findings primarily capture the association between fundamentals and stock returns. Second, unscaled emissions, the variable typically used in academic literature, is correlated with stock returns but emissions intensity (emissions scaled by firm size), a more common measure in practice, is not. While unscaled emissions represents an important metric for society we argue that, for individual firms, emissions intensity is an appropriate measurement choice to assess carbon performance. The associations between emissions and returns disappear after accounting for either of the issues above.

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

JEL Classification: M14, G23, G34