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The impact of carbon risk on stock returns: evidence from the European electric utilities

Author

Listed:
  • Enrico Bernardini
  • Johnny Di Giampaolo
  • Ivan Faiella
  • Riccardo Poli

Abstract

The decarbonization process has made obsolete the traditional value-creation model of companies operating in the electricity sector, particularly affecting those with a greater share of fossil fuels in their energy mix that have been forced to write down their carbon-intensive activities with a negative impact on operating income, equity and leverage. Institutional investors have a significant exposure to equity and debt of European Electric Utilities: if the transition process towards a low-carbon system is faster than expected, the risk that these weaknesses may spread across the financial system shouldn’t be underestimated. Analyses based on risk-premium factor models show that there was a significant low-carbon premium during the years in which the decarbonization process accelerated; in the period considered, an investment strategy that focused more on low-carbon companies would have delivered higher returns without modifying the overall risk profile.

Suggested Citation

  • Enrico Bernardini & Johnny Di Giampaolo & Ivan Faiella & Riccardo Poli, 2021. "The impact of carbon risk on stock returns: evidence from the European electric utilities," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 11(1), pages 1-26, January.
    • Handle: RePEc:taf:jsustf:v:11:y:2021:i:1:p:1-26
    DOI: 10.1080/20430795.2019.1569445
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    Citations

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    Cited by:

    1. Pawel Witkowski & Adam Adamczyk & Slawomir Franek, 2021. "Does Carbon Risk Matter? Evidence of Carbon Premium in EU Energy-Intensive Companies," Energies, MDPI, vol. 14(7), pages 1-18, March.
    2. Reboredo, Juan C. & Ugolini, Andrea, 2022. "Climate transition risk, profitability and stock prices," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Namasi G. Sankar & Suryadeepto Nag & Siddhartha P. Chakrabarty & Sankarshan Basu, 2024. "The Carbon Premium: Correlation or Causation? Evidence from S&P 500 Companies," Papers 2401.16455, arXiv.org.
    4. Thomas Cauthorn & Christian Klein & Leonard Remme & Bernhard Zwergel, 2023. "Portfolio benefits of taxonomy orientated and renewable European electric utilities," Journal of Asset Management, Palgrave Macmillan, vol. 24(7), pages 558-571, December.
    5. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    6. Vlad-Cosmin Bulai & Alexandra Horobet & Oana Cristina Popovici & Lucian Belascu & Sofia Adriana Dumitrescu, 2021. "A VaR-Based Methodology for Assessing Carbon Price Risk across European Union Economic Sectors," Energies, MDPI, vol. 14(24), pages 1-21, December.
    7. Campiglio, Emanuele & van der Ploeg, Frederick, 2021. "Macro-Financial Transition Risks in the Fight Against Global Warming," RFF Working Paper Series 21-15, Resources for the Future.
    8. Siddhartha P. Chakrabarty & Suryadeepto Nag, 2023. "Risk measures and portfolio analysis in the paradigm of climate finance: a review," SN Business & Economics, Springer, vol. 3(3), pages 1-22, March.
    9. Olatunji Abdul Shobande & Joseph Onuche Enemona, 2021. "A Multivariate VAR Model for Evaluating Sustainable Finance and Natural Resource Curse in West Africa: Evidence from Nigeria and Ghana," Sustainability, MDPI, vol. 13(5), pages 1-15, March.
    10. Zanin, Luca, 2023. "A flexible estimation of sectoral portfolio exposure to climate transition risks in the European stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    11. Yevheniia Antoniuk, 2023. "The effect of climate disclosure on stock market performance: Evidence from Norway," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(2), pages 1008-1026, April.
    12. Dirk Broeders & Marleen de Jonge & David Rijsbergen, 2024. "The European Carbon Bond Premium," Working Papers 798, DNB.

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