The pricing of climate transition risk in Europe’s equity market
Published: 10 August 2023
We assess whether climate transition risk is priced in Europe’s equity market by analysing relative equity returns of high versus low CO2-emitting firms. We use a panel data set covering firmspecific carbon emissions of 1555 European companies over the period 2005-2019. We add to the existing literature by addressing problems in carbon data and by using various econometric methods ranging from panel data analysis to synthetic control methods. Fama-French style panel regressions at both the individual firm level as well as portfolio level suggest that carbon intensity is negatively related to stock returns. Treatment effect models, however, provide some evidence for increased pricing of climate transition risk after the Paris Agreement.
Keywords: Climate Change; Carbon Emissions Intensity; Paris Agreement; Transition Risk Premia
JEL codes G12; Q54
Working paper no. 788
788 - The pricing of climate transition risk in Europe’s equity market
Research highlights:
- To assess pricing of climate policy risk in European equities, we analyze relative returns of high versus low CO2-emitting firms.
- We address problems in CO2-data and use various econometric methods ranging from panel data analysis to treatment effect models.
- We find that investors do not price in climate policy risk as they require no extra compensation for investing in high CO2-emitting firms.
- The Paris Agreement did positively impact high CO2-emitting firms’ stock returns, suggesting a gradual shift to market pricing of climate policy risk.
- Governments may have to signal more ambitious future climate policies if they want to see capital reallocated to low CO2-emitting firms.
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