Carbon Beta: A Market-Based Measure of Climate Risk
59 Pages Posted: 18 Nov 2021 Last revised: 7 Sep 2022
Date Written: September 6, 2022
We estimate asset-level climate risk exposure by regressing stock returns on a pollutive minus clean portfolio. This climate risk measure, or ‘carbon beta’, has relatively high levels of availability,
coverage, and informativeness. We study the interaction of carbon betas with several proxies for realisations in climate risk. Returns to stocks with high carbon betas are lower during months in which climate change is more frequently discussed in the news, during months in which temperatures are abnormally high, and during exceptionally dry months. Variation in carbon betas correlates with green patent issuance and forward-looking measures of climate risk.
Keywords: Climate change, carbon risk, climate finance, asset pricing
JEL Classification: G11, G12, Q54
Suggested Citation: Suggested Citation