Carbon Risk
Series
Working Paper
Type
working paper
Date Issued
2020
Author(s)
Abstract
We investigate carbon risk in global equity prices. We develop a measure of carbon risk using industry standard databases and study return differences between brown and green firms. We observe two opposing effects: Brown firms are associated with higher average returns, while decreases in the greenness of firms are associated with lower announcement returns. We construct a carbon risk factor-mimicking portfolio to understand carbon risk through the lens of a factor-based asset pricing model. While carbon risk explains systematic return variation well, we do not find evidence of a carbon risk premium. We show that this may be the case because of: (1) the opposing price movements of brown firms and firms becoming greener, and (2) that carbon risk is associated with unpriced cash-flow changes rather than priced discount-rate changes. We extend our analysis to different geographic regions and time periods to confirm the missing risk premium.
Language
English
HSG Classification
contribution to scientific community
Subject(s)
Eprints ID
263559