Are Carbon Emissions Associated with Stock Returns?

Review of Finance, forthcoming

56 Pages Posted: 9 Mar 2021 Last revised: 23 Feb 2023

See all articles by Jitendra Aswani

Jitendra Aswani

MIT Sloan Finance Group

Aneesh Raghunandan

London School of Economics

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Multiple version iconThere are 2 versions of this paper

Date Written: February 23, 2023

Abstract

An influential emerging literature documents strong correlations between carbon 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 such fundamentals and returns. Second, unscaled emissions, the variable typically used in academic literature, is correlated with stock returns but emissions intensity (emissions scaled by firm size), an equally important measure used in practice, is not. While unscaled emissions represent 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, Trucost, Estimated Emissions, Emissions Disclosure

JEL Classification: G12, G23, G30, D62, M14

Suggested Citation

Aswani, Jitendra and Raghunandan, Aneesh and Rajgopal, Shivaram, Are Carbon Emissions Associated with Stock Returns? (February 23, 2023). Review of Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3800193 or http://dx.doi.org/10.2139/ssrn.3800193

Jitendra Aswani

MIT Sloan Finance Group ( email )

Cambridge, MA

Aneesh Raghunandan (Contact Author)

London School of Economics ( email )

United Kingdom

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

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