Emissions trading

Finance

Engineering

Profitability index

Business

Risk premium

Artificial intelligence

Economics

Ecology

Stock (firearms)

Salient

Computer science

Greenhouse gas

Monetary economics

Mechanical engineering

Biology

Journal of Financial Economics

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.

Do investors care about carbon risk?