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Do Investors Care About Climate Risk?

Patrick Bolton and Marcin Kacperczyk

This paper explores whether carbon emissions affect the cross-section of U.S. stock returns. We find that stocks of firms with higher CO2 emissions earn higher returns, after controlling for size, book-to-market, momentum, and other factors that predict returns. 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 scope 1 emissions in a few salient industries. These results are consistent with an interpretation that investors are demanding compensation for their exposure to carbon risk.