Climate Transition Risk, Profitability and Stock Prices
57 Pages Posted: 18 May 2021 Last revised: 6 Sep 2022
Date Written: September 1, 2020
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: Suggested Citation