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Do investors care about carbon risk?

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  • Bolton, Patrick
  • Kacperczyk, Marcin

Abstract

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.

Suggested Citation

  • Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    • Handle: RePEc:eee:jfinec:v:142:y:2021:i:2:p:517-549
    DOI: 10.1016/j.jfineco.2021.05.008
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    More about this item

    Keywords

    Carbon emissions; Climate change; Stock returns; Institutional investors;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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