Carbon Premium Around the World, Bolton & Kacperczyk (2020)
RESEARCH
ABSTRACT
This paper explores how the carbon premium varies around the world. We estimate the stock return premium associated with carbon emissions at the firm level in a cross-section of over 14,400 firms in 77 countries. We find that there is a widespread carbon premium-higher stock returns for companies with higher carbon emissions-in all sectors over three continents, Asia, Europe, and North America. Stock returns are affected by both direct and indirect emissions through the supply chain. In addition, the carbon premium has been rising in recent years. We also find widespread divestment based on carbon emissions by institutional investors around the world, but institutional investors tend to focus their divestment on foreign companies.
Research target
Investigate how corporate carbon emissions affect stock returns, with a focus on the role of institutional investors' behaviors.
Methodology
Regressions
Data
Trucost: Annual firm-level carbon and other greenhouse gas emissions
FactSet: Stock returns, corporate balance sheets, and institutional ownership
Total 14,468 unique companies in 77 countries from 2005 to 2018
Findings
There is actually a positive and significant carbon premium in most areas of the world. It is present in North America, Europe, and Asia. The only exception is Africa, Australia, and South America, where we do not find a significant premium. There are similar carbon premia in China and in the U.S.
Carbon premium is related to the level of emissions (and changes in the level of emissions), but not to emission intensity—the ratio of a firm’s total emissions to sales.
Institutional investor divestment policies are focused entirely on a firm’s direct emission intensity (the ratio of direct emissions from production to sales).
More democratic countries with stronger rule of law tend to have lower carbon premia, other things equal. One possible interpretation of this result is that in these countries green public opinion has already resulted in significant tightening of regulations of carbon emissions, so that the transition risk going forward is lower.
Countries that have been exposed to greater damages from climate disasters (floods, wild-fires, droughts, etc.) have a somewhat higher carbon premium associated with the level of direct emissions.
There is a significant divestment based on a direct emission-intensity screen. Overall divestment is concentrated among three categories, investment companies, independent advisers, and pension funds, who are significantly underweight companies with high direct emission intensity.
Domestic institutional investors concentrate their exclusionary screening primarily on foreign companies. Both passive and active management funds conduct divestment.
Comments
This paper covers many interesting carbon risk-related topics.
The methodology misses major climate-related progress, events, and policy changes.
Regressions are not sufficient for premium analysis.
Ignore the changing carbon emission risks and dynamic market interpretation in different countries with distinct progress in the transition to the green economy.