Does the Carbon Premium Reflect Risk or Outperformance?
FEB-RN Research Paper No. 03/2024
European Corporate Governance Institute – Finance Working Paper No. 940/2023
HKU Jockey Club Enterprise Sustainability Global Research Institute - Archive
35 Pages Posted: 25 Sep 2023 Last revised: 14 Dec 2024
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 have 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 outperformance. 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. When adding in announcement returns to events related to earnings calls, earnings guidance, dividends, and buybacks, this proportion rises to 40-65%. 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: Climate Finance, Socially Responsible Investing, Corporate Social Responsibility, ESG Investing, Carbon Premium
JEL Classification: G12, G23, G38
Suggested Citation: Suggested Citation
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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