The pricing of climate transition risk in Europe’s equity market

Abstract

We assess whether climate transition risk is priced in Europe’s equity market by analysing relative
equity returns of high versus low CO2-emitting firms. We use a panel data set covering firmspecific
carbon emissions of 1555 European companies over the period 2005-2019. We add to the existing literature by addressing problems in carbon data and by using various econometric methods ranging from panel data analysis to synthetic control methods. Fama-French style panel regres-sions at both the individual firm level as well as portfolio level suggest that carbon intensity
is negatively related to stock returns. Treatment effect models, however, provide some evidence
for increased pricing of climate transition risk after the Paris Agreement.

Keywords: Climate Change,Carbon Emissions Intensity, Paris Agreement, Transition Risk Premia

JEL Classification: G12, Q54