Do Investors Care about Carbon Risk?

Firms with better ESG performance have lower exposure to climate risk and earn lower returns, consistent with increased investor demand due to the high potential to hedge against climate risk.

“Firms with better ESG performance have lower exposure to climate risk and earn lower returns, consistent with an increased investor demand due to the high potential to hedge against climate risk (Ardia et al., 2022;Bolton & Kacperczyk, 2021;Engle et al., 2020;Huynh & Xia, 2021).”

Investing in non-ESG firms introduces additional risks such as carbon emission risk, environmental regulation risk, biodiversity risk, physical risk, transition risk or litigation risk heightened by social norms.

“On the one hand, investing in non-ESG firms introduces additional risk such as carbon emission risk, environmental regulation risk, biodiversity risk, physical risk, transition risk or litigation risk heightened by social norms”

Green firms generate lower returns relative to brown firms.

“At the firm level, M.Baker et al. (2022), Bolton and Kacperczyk (2021), Garel et al. (2023) and Hsu et al. (2023), Hong and Kacperczyk (2009), Zerbib (2019) show that green firms generate lower returns relative to brown firms.”

Bolton and Kacpercyk (2020a, 2021) find that firms with higher carbon emissions have higher equity returns, consistent with a carbon premium, both for U.S. companies and globally.

“Studying carbon risk exposures, Bolton and Kacpercyk (2020a, 2021) find that firms with higher carbon emissions have higher equity returns, consistent with a carbon premium, both for U.S. companies and globally.”

Jouvenot and Krueger (2020) pinpoint investor pressures as a potential driver of the U.K. emission reductions, consistent with Bolton and Kacpercyk (2021).

“Exploring the mechanism, Jouvenot and Krueger (2020) pinpoint investor pressures as a potential driver of the effects, consistent with Bolton and Kacpercyk (2021).”