Are carbon emission risks priced in stock returns?
Patrick Bolton and Marcin Kacperczyk investigate in their 2020 paper "Do Investors Care about Carbon Risk?" whether carbon emissions are a material risk for investors that is reflected in stock returns.
Their main results and implications are:
- Firms with higher total carbon emissions and increases in emissions earn higher stock returns, even after controlling for size, book-to-market, momentum, and other return predictors.
- There is no significant effect of emission intensity on stock returns, which is notable given that emission intensity is a common exclusionary screening indicator used by institutional investors.
- The authors interpret these higher stock returns as investors demanding compensation for exposure to carbon emission risk, creating a carbon risk premium.
- Differences in unexpected profitability or other known risk factors cannot explain the carbon premium observed.
- Institutional investors perform negative screening on a few industries with the highest CO2 emissions, including oil and gas, utilities, and motor industries.
- These divestment strategies are based on scope 1 emission intensity and do not significantly affect stock returns.
These findings have implications for understanding how carbon risk is priced in the market and the effectiveness of exclusionary screening strategies.
The study uses corporate carbon emission data from Trucost and matches it with FactSet returns and balance-sheet data for U.S.-listed companies from 2005 to 2017.
These results should be interpreted with care without additional insight into the global and longer-term integration of the Paris Agreements by institutional investors.