Do investors care about carbon risk?

We study whether carbon emissions affect the cross-section of US stock returns. We find that stocks of firms with higher total carbon dioxide emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. We cannot explain this carbon pre...

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Bibliographic Details
Published in:Journal of financial economics Vol. 142; no. 2; pp. 517 - 549
Main Authors: Bolton, Patrick, Kacperczyk, Marcin
Format: Journal Article
Language:English
Published: Amsterdam Elsevier B.V 01.11.2021
Elsevier Sequoia S.A
Subjects:
Carbon
Carbon dioxide
Carbon emissions
Climate change
Compensation
Emissions
Emissions control
Financial economics
Greenhouse gases
Institutional investments
Institutional investors
Investors
Profitability
Risk
Risk factors
Sales
Stock returns
Stocks
Studies
D62
Climate change
G30
G12
G23
Stock returns
Institutional investors
Carbon emissions
ISSN:0304-405X, 1879-2774
Online Access:Get full text
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Summary:We study whether carbon emissions affect the cross-section of US stock returns. We find that stocks of firms with higher total carbon dioxide emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. We cannot explain this carbon premium through differences in unexpected profitability or other known risk factors. We also find that institutional investors implement exclusionary screening based on direct emission intensity (the ratio of total emissions to sales) in a few salient industries. Overall, our results are consistent with an interpretation that investors are already demanding compensation for their exposure to carbon emission risk.
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ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.05.008