Climate Transition Risk, Profitability and Stock Prices

57 Pages Posted: 18 May 2021 Last revised: 6 Sep 2022

See all articles by Juan C. Reboredo

Juan C. Reboredo

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Andrea Ugolini

Universidade do Estado do Rio de Janeiro (UERJ) - Department of Quantitative Analysis

Date Written: September 1, 2020

Abstract

We investigate whether climate transition risk is reflected in the financial performance and cross-section pricing of publicly-traded European and US firms. Using a firm-level carbon risk score (CRS) that assesses the vulnerability of a firm’s value to transition to a low-carbon economy, we find that firms with the lowest transition risk exposures perform better financially, and that European firms are more sensitive to transition risks than US firms. We also find that stocks with low exposure to transition risk offer greater returns to investors, consistent with the fact that stock prices of firms do not adequately reflect underlying climate transition risk. Relative financial performance of less vulnerable firms and underreaction effects to transition risk decreased after COP21.

Keywords: Climate transition risk, Financial Performance, Profitability, Stock Returns

JEL Classification: G12, G14, G32, Q54

Suggested Citation

Reboredo, Juan C. and Ugolini, Andrea, Climate Transition Risk, Profitability and Stock Prices (September 1, 2020). International Review of Financial Analysis, Vol. 83, No. 102271, 2022, Available at SSRN: https://ssrn.com/abstract=3847687 or http://dx.doi.org/10.2139/ssrn.3847687

Juan C. Reboredo

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain

Andrea Ugolini (Contact Author)

Universidade do Estado do Rio de Janeiro (UERJ) - Department of Quantitative Analysis ( email )

Rio de Janeiro
Brazil

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