Are Carbon Emissions Associated with Stock Returns?

Do equity markets price carbon transition risks?

Jitendra Aswani, Aneesh Raghunandan and Shiva Rajgopal contribute to the abundant existing literature on the topic with their paper « Are Carbon Emissions Associated with Stock Returns? ».

This question is paramount for both financial markets and the broader transition towards a more sustainable economy. The authors conclude that:

• In line with other research results, they find a positive relation between unscaled emissions and stock returns.
• Emissions disclosed by firms show weaker correlations with stock returns than those estimated by third parties.
• Estimated emissions show strong correlations with firms' fundamentals, suggesting the relation between emissions and returns actually reflects the correlation between fundamentals and returns.turns actually reflects the correlation between fundamentals and returns.
• These results are mitigated when accounting for the company size, even though carbon intensity can be seen as a more relevant measure of carbon performance at the firm level.

These conclusions stress that the relationship between carbon emissions and stock return is, in fact, driven by the estimation methodologies of the third-party providers used in previous studies. A focus on unscaled emissions rather than carbon intensity is also a design choice to keep in mind for practitioners and policymakers, as they are mechanically linked to productivity and size, which may bias statistical results.