Carbon Beta: A Market-Based Measure of Climate Transition Risk Exposure

Abstract

We estimate asset-level climate transition risk exposure by regressing stock returns on a pollutive-minus-clean portfolio. This climate risk measure is forward-looking, able to distinguish transition winners from losers, and can be calculated for any asset for which returns are observed. Returns to stocks with high carbon betas are lower during months in which climate change is more frequently discussed in the news, 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. Finally, carbon beta is priced in the cross-section of equity returns.

Keywords: Climate change, carbon risk, climate finance, asset pricing

JEL Classification: G11, G12, Q54