Does the Carbon Premium Reflect Risk or Mispricing?

26 Pages Posted: 25 Sep 2023 Last revised: 27 Nov 2023

See all articles by Yigit Atilgan

Yigit Atilgan

Sabanci University

K. Ozgur Demirtas

Sabanci University Graduate School of Management

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

A. Doruk Gunaydin

Sabanci University

Date Written: November 10, 2023

Abstract

Prior research has documented a carbon premium in realized returns, which has been assumed to proxy for expected returns and thus the cost of capital. We find that the carbon premium partially represents unexpected returns and thus mispricing. Companies with higher scope 1, scope 2, or scope 3 emissions enjoy superior earnings surprises and earnings announcement returns; quarterly earnings announcements account for 30-50% of the premium. We find similar results for changes in emissions but not scaled emissions, consistent with earlier findings on realized returns. Our results suggest that the carbon premium, where it exists, partially results from an unpriced externality, highlighting the need for government action.

Keywords: Carbon Premium, Climate Finance, Socially Responsible Investing, Corporate Social Responsibility, ESG Investing

JEL Classification: G12, G23, G38, J53, J81, J83, J88, K31

Suggested Citation

Atilgan, Yigit and Demirtas, K. Ozgur and Edmans, Alex and Gunaydin, A. Doruk, Does the Carbon Premium Reflect Risk or Mispricing? (November 10, 2023). European Corporate Governance Institute – Finance Working Paper No. 940/2023, Available at SSRN: https://ssrn.com/abstract=4573622 or http://dx.doi.org/10.2139/ssrn.4573622

Yigit Atilgan

Sabanci University ( email )

Orta Mahalle Üniversite Caddesi 27
Istanbul, Orhanli, 34956 Tuzla 34956
Turkey

K. Ozgur Demirtas

Sabanci University Graduate School of Management ( email )

Sabanci University, School of Management
Orhanli Tuzla
Orhanlı-Tuzla, Istanbul, 34956
Turkey
(+90) 216-483-9985 (Phone)
(+90) 216-483-9699 (Fax)

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

A. Doruk Gunaydin

Sabanci University ( email )

School of Management
Orhanli Tuzla
İstanbul, 34956
Turkey

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