Working Paper: CEPR ID: DP18594
Authors: Yigit Atilgan; Ozgur Demirtas; Alex Edmans; Doruk Gunaydin
Abstract: Prior research has documented a carbon premium in realized returns, which have been assumed to proxy for expected returns and thus the cost of capital. We find that the carbon premium partially represents unexpected returns and thus mispricing. Companies with higher scope 1, scope 2, or scope 3 emissions enjoy superior earnings surprises and earnings announcement returns; quarterly earnings announcements account for 30-50% of the premium. We find similar results for changes in emissions but not scaled emissions, consistent with earlier findings on realized returns. Our results suggest that the carbon premium, where it exists, partially results from an unpriced externality, highlighting the need for government action.
Keywords: carbon premium; climate finance; socially responsible investing; corporate social responsibility; ESG investing
JEL Codes: G12; G23; G38; J53; J81; J83; J88; K31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher scope 1, 2, or 3 emissions (Q58) | superior earnings surprises (G14) |
| quarterly earnings announcements (G14) | carbon premium (Q58) |
| mispricing (D49) | carbon premium (Q58) |
| demand shocks (E39) | positive relationship between emissions and earnings surprises (Q43) |
| emissions intensities (L94) | earnings surprises (G14) |