SSRN 3550233

Global Pricing of Carbon-Transition Risk
Patrick Bolton§ and Marcin Kacperczykφ

August 5, 2022
Journal of Finance forthcoming
Abstract: The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating
the market-based premium associated with carbon-transition risk in a cross-section of 14,400 firms in 77
countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in
all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in
countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia
related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased
with investor awareness about climate change risk.
JEL codes G12, G23, G30, D62

Keywords: carbon emissions, short-term and long-term carbon-transition risk, climate change, stock returns
§ Columbia University, Imperial College, CEPR, and NBER

φ Imperial College and CEPR
We thank Lucian Bebchuk, John Cochrane, Harrison Hong, Paul Hsu, Louis Kaplow, Paymon Khorrami, Christian Leuz,
Pedro Matos, Stefan Nagel (the editor), Kunal Sachdeva, Zacharias Sautner, two referees, and the associate editor for many
helpful suggestions. We are also grateful to seminar participants at the Bank for International Settlements, Bank of
England, Bank of Italy, Bank of Japan, Blackrock, Danmarks Nationalbank Climate Conference, Florida State University,
Harvard Law School, HEC Montreal, Imperial College, INSEAD, Mayo Finance Seminar, McGill, NBER LTAM
Meetings, NBIM, Rice University, University of Alberta, University of Cyprus, University of Geneva Climate Conference,
University of Miami, UNPRI, Virtual Seminar on Climate Economics, and the World Bank for their comments. We are
grateful to Trucost for giving us access to their corporate carbon emissions data, and to Adrian Lam and Jingyu Zhang for
their very helpful research assistance. Some of the ideas in this paper have been reported in the working draft: “Carbon
Premium around the World”. This project has received funding from the European Research Council (ERC) under the
ERC Advanced Grant program (grant agreement No. 885552 Investors and Climate Change). We have read The Journal of
Finance disclosure policy and have no conflicts of interest to disclose.
Electronic copy available at: https://ssrn.com/abstract=3550233

Public opinion, governments, business leaders, and institutional investors all over the world are
awakening to the urgency of combatting climate change.1 This growing concern about climate change
may crystalize into a faster and perhaps more disorderly transition away from fossil fuels to renewable
energy. By now, over 100 countries have committed to carbon net neutrality targets, representing
nearly 50% of world GDP. In addition, several multilateral agreements and other commitments to
reduce carbon emissions have been reached.2 This, in turn, means greater carbon-transition risk for
companies, especially those that rely more on fossil fuel production or consumption. From an
individual firm’s perspective, transition risk reflects the uncertain rate of adjustment towards carbon
neutrality. From investors’ perspective, the risk also embodies evolving beliefs about the transition to
cleaner energy. Hence, transition risk is the amalgamation of a wide range of shocks, including changes
in climate policy, reputational impacts, shifts in market preferences and norms, and technological
innovation. In this paper, we take a (forward-looking) global financial-market perspective to evaluate
the economic importance investors attach to this transition risk, by looking at stock prices of a large
set of global companies with different degrees of exposure to this risk.
The economics literature on climate change following Nordhaus (1991) has framed the issue
of mitigation of climate change as a public goods problem that requires a global Pigouvian carbon tax
to internalize the externality of carbon emissions. The tax should be set equal to the social cost of
carbon (SCC) to achieve efficiency, where the SCC is given by the discounted, expected, physical harm
from a warming climate caused by the accumulation of carbon particles in the atmosphere. This
literature does not address the transition risk that firms relying on fossil energy face as the economy
adjusts to a renewable energy base. In contrast, the finance literature on climate change is more directly
concerned with the pricing of climate change risk, in particular transition risk. But this literature is
still in its infancy, and we currently only have patchy evidence on the pricing of carbon-transition risk,
and especially on the various sources of this risk. Accordingly, in this study we attempt a more
systematic, more wide-ranging, analysis than has been done to date on the pricing of transition risk.
We explore how corporate carbon emissions together with country characteristics that reflect the
country’s likely progress in the energy transition affect stock returns of over 14,400 listed companies
1 Some of the most notable actions include the national and pan-national initiatives, such as Conference of the Parties
(COP), Nationally Declared Contributions (NDCs) supported by the United Nations, or the G20 Taskforce for Climate-
related Financial Disclosure (TCFD).

2 Some of the prominent examples include China’s commitment of carbon net neutrality by 2060, and Japan’s and U.K.’s
commitments by 2050. See Bolton and Kacperczyk (2021b) for more details on net zero commitments.

in 77 countries over a period ranging from 2005 to 2018. This is essentially the universe of all listed
companies globally for which it is possible to obtain carbon emissions data and represents 80% of the
market value of all public firms.
As is well known, cross-country studies are beset by endogeneity and identification challenges,
as country-level variation can be driven by many different sources. In this study, we can to some
extent overcome these challenges by exploiting a rich country, industry, firm-level variation in carbon
emissions and other characteristics to identify the different sources of transition risk relating to
technological shifts, social norms, and energy policies. This granularity of firm-level observations can
be combined with various fixed effects to better understand what is driving transition risk. To our
knowledge, this is the first study in economics on transition risk with such a large panel data structure.
A first contribution of our paper is to shed light on the distribution of corporate carbon
emissions across all countries in our sample. In most studies on global carbon emissions the unit of
analysis is the country and little information is provided about the breakdown of emissions across
companies within each country. According to Fortune magazine, in 2017 the 500 largest companies
in the world generated $30 trillion in revenues3. This represents 37.5% of World GDP, which was
around $80 trillion in 2017 according to the CIA's World Factbook. It is thus natural to view climate
change mitigation not just through the lens of the largest emitting countries, but also through the lens
of the largest emitting companies.
As a second contribution of our paper, we estimate the size of a global carbon-transition risk
premium by relating lagged firm-level emissions to individual stock returns. Given the lack of concern
about climate change until recently, a plausible null hypothesis is that we should not find higher stock
returns for companies with higher carbon emissions over our sample period, with the exception
perhaps of Europe (and to some extent the United States, Japan, and a few other OECD countries).
A reasonable alternative hypothesis, however, is that investors do pay attention to climate risk and
that a carbon premium is to be found in the parts of the world responsible for the highest fraction of
carbon emissions, that is, in the largest and most developed economies. It is in these economies that
emission reductions are most urgent and therefore where transition risk is highest.
A few general striking results emerge from our analysis. A first general finding is that the
carbon premium is positively related to both the level of emissions and the year-to-year growth in
emissions, controlling for characteristics that predict returns. Given that the carbon transition is in
essence transitory, carbon transition risk a priori ought to be reflected in both the levels and rates of
change in emissions. We also find that the premium is related to both direct emissions from
3 https://fortune.com/global500/2018/
3

production (scope 1) and indirect emissions from firms in the supply chain (scope 2 and scope 3). All
the results are statistically and economically highly significant. As an example, a one-standard-
deviation increase in cross-sectional scope 1 emissions is associated with a 1.1% increase in annualized
stock returns. A comparable result for changes in emissions is 2.2%. In general, the magnitude of the
effect is stronger when we account for underlying differences across industries, which underscores the
importance of industry adjustment in any study of carbon transition risk. It is also stronger for indirect
scope 3 emissions.
Our findings bring out the fact that a firm’s exposure to carbon-transition risk is proportional
to the level of its emissions. This is a very robust finding, which goes against the near exclusive focus
of attention on emission intensity (the ratio of carbon emissions over sales, assets, or Kwh) by
practitioners and other climate finance studies. There are two reasons why asset managers have
focused on emission intensity. First, from a portfolio diversification perspective, the emission intensity
measure allows for a portfolio construction approach that is independent of the size of the portfolio.
Second, emission intensity treats firms of different size the same way. Firms are evaluated on their
carbon efficiency per unit of sales. By that metric a large firm can be seen as more environmentally
friendly than a small firm, even though its climate impact in terms of the size of its carbon emissions
is much larger.
To be sure, the Financial Times-Statista ranking of Europe’s Climate Leaders ranks which
companies performed best in terms of improving their carbon intensity. As the Financial Times (2022)
article listing the best performers explains: “the 400 companies listed below are those that achieved
the greatest reduction in their Scope 1 and 2 greenhouse gas (GHG) emissions intensity over a five-
year period—2015-20 this time”.4 Two problematic examples from this list (among others) are Fortum
with a reported 29,8% reduction in emission intensity, but an increase in total emissions of 157,2%,
and Axereal with a 23,8% reduction in emission intensity but an increase in total emissions of 236,2%.
The list of Climate Leaders also includes companies with huge GHG emissions, for example Engie
with 40.9 million tons of CO2e for 2020, or Holcim Group with 117 million tons of CO2e. These
examples vividly illustrate the difficulty with carbon intensity as a measure of carbon transition risk.
4 Neville Hawcock “Special Report: Europe’s Climate Leaders 2022,” Financial Times, 8 April 2022.
https://www.ft.com/climate-leaders-europe-2022

Given the limited, and fast disappearing, carbon budget (consistent with maintaining a
temperature rise below 1.5o C with 83% probability)5, any improvement in carbon efficiency is of
course desirable. Yet, the overriding objective for the world is to achieve carbon neutrality and bring
net emissions down to zero. The fact that all Net Zero pledges are in terms of absolute emission
reduction targets is telling. What the world needs and aims for is first a reduction in carbon emission
levels, and second only an improvement in carbon efficiency. It is therefore to be expected that
investor exposure to carbon transition risk would be proportional to the level of emissions. The size
of emissions is also the core focus of institutional investor initiatives to reduce carbon emissions, such
as Climate Action 100+, which aims “to ensure [that] the world’s largest corporate greenhouse gas
emitters take necessary action on climate change.”6
Interestingly, the levels and growth in emissions affect the carbon premium independently,
which we interpret as reflecting both a long-run and short-run component in carbon-transition. Given
that emissions are highly persistent over time, the level of emissions picks up the long-run exposure
to transition risk, whereas changes reflect a company’s short-run drift away from (or into) greater
future emissions. Changes in emissions could also reflect changes in earnings, but we control for this
effect by adding the company’s return on equity and sales growth among our independent variables.
To provide additional robustness to our estimation of the carbon premium, and to partially
address the possibility that stock returns are noisy, we also relate carbon emissions to firms’ book to
market ratios. We find that a one-standard-deviation increase in cross-sectional direct emissions is
associated with 13% higher book to market ratios, again controlling for a host of fixed effects and
firm characteristics. These results corroborate our return-based findings. In particular, the economic
magnitude of these findings is within the range of our return estimates. This adds further evidence
against the interpretation that the carbon premium is driven by unexpected return components.
A second general finding is a positive and significant carbon premium in most areas of the
world. It is present in North America, Europe, and Asia, but with different magnitudes. It is less
present in the Southern Hemisphere region, but this is an economically and socially more diverse
group of countries. Our cross-country results also suggest that financial markets are not fully
integrated globally. A simple categorization of countries based on their level of economic development
does not explain the variation in carbon premium across countries. However, at a more granular level,
we find that the short-term carbon premium is generally higher among firms that are headquartered
5 See IPCC. 2021. “Climate Change 2021, The Physical Science Basis, Summary for Policy Makers,”
https://www.ipcc.ch/report/sixthassessment-report-working-group-i.
6 See https://www.climateaction100.org/
5

in countries with more modest economic development. It is higher in countries with lower GDP per
capita, countries whose economic output relies more on the manufacturing sector, and in countries
with less developed healthcare sectors. Yet, the same characteristics cannot explain the cross-country
variation in the long-term carbon premium. These results stand in contrast to the common view that
carbon transition is exclusively a problem for developed countries.
As a third general contribution of our paper, we study the different sources of this carbon-
transition risk. The main premise of our tests is that in partially segmented markets, the local country
environment can amplify or mitigate the average premium. Since country-level evidence is possibly
subject to omitted variables bias, we exploit firm-level variation in carbon emissions in conjunction
with a variety of firm-level controls and fixed effects to better identify each economic channel. Our
identification approach is similar to the one effectively used by Rajan and Zingales (1998) in their
study of the link between financial development and economic growth.
We identify several country-level characteristics that matter significantly. We group these
characteristics into two broad categories, respectively political or social factors, and energy factors.
Regarding political factors, we find that both “voice” and “rule of law” significantly affect the short-
run carbon premium associated with the growth in emissions. More democratic countries (with
stronger rule of law) tend to have lower carbon premia, other things equal. Further, we find that the
long-term carbon premium is larger in countries with tighter climate policies. This finding suggests
that investors perceive climate policies to be permanent and unlikely to be reversed. Notably, when
we separate domestic policies from international agreements, we find that only the former are
economically significant, and the latter have a very small effect. This result underscores the
importance of political coordination costs associated with climate policies, a problem that has beset
the international community in recent years.
When we consider country-level variations in energy mix, we find that the carbon premium is
lower in countries with a higher share of renewable energy, and higher in countries with greater
dependence on the energy sector. The energy mix effect is reflected in the short-term premium, which
suggests that any technological shocks are perceived as transitory, or alternatively as a factor that is
hard to estimate in the long run. Interestingly, we find that a country’s energy consumption is not a
significant predictor of the carbon premium, which underscores the importance of distinguishing
between the production and consumption sides of energy.
Finally, we also find that in the countries that have been exposed to greater damages from
climate disasters (floods, wild-fires, droughts, etc.) there is no significantly different carbon premium.
This result suggests that the carbon premium does not reflect physical climate risks, nor that physical

risk is positively correlated with transition risk, or that (consistent with the findings of Hong et al.,
2019) transition risk may be more salient to investors in countries experiencing rising physical risk.
The socio-political and energy-related channels mostly reflect the cash-flow effects related to
transition risk. Of equal importance may be discount-rate effects that reflect investors’ perceptions
about carbon-transition risk. To assess the importance of the latter, we consider natural time-period
breaks in our sample period. Given that climate change has become a major issue for investors only
recently we explore how the carbon premium has changed in recent years. We compare the estimated
premia for the two years leading up to the Paris agreement in 2015 and following the agreement.
Several striking results emerge from this analysis. First, when we pool all countries together, we find
that there was no significant premium right before the Paris agreement, but a highly significant and
large premium after the agreement. This result is consistent with the view that the Paris agreement has
changed investors’ awareness regarding the urgency of climate change. Second, the change in carbon
premium is mostly related to long-term risks, which given our previous results suggests that the Paris
agreement led investors to update their beliefs about the long-term impact of climate policy tightness
rather than on the short-term impact of technological shocks or changes in the political environment.
Finally, when we break down the change in the carbon premium around the Paris agreement by
continent, we find that the premium has sharply risen in Asia, and less so in North America and
Europe. In effect, Asia is entirely responsible for the rise in the global carbon premium around the
Paris agreement.
A difficult question to answer is how changes in carbon-transition risk get impounded into
asset prices. From an equilibrium perspective, our results imply the existence of a transition stage
during which prices of assets with low emissions are bid up while prices of assets with high emissions
are bid down in response to changing investor beliefs. The different repricing phases are difficult to
pin down since individual asset prices may transition at different times and at different speeds. Still,
we provide some evidence that such repricing has indeed taken place. We show that the rise in the
use of renewable technology coincides with the decrease in stock prices of oil majors. Similar findings
can be observed for countries that rely more on natural resources. These repricing effects are
economically large and underscore the importance of the energy transition to a new equilibrium.
Related Literature
We are obviously not the first to undertake a cross-country analysis in sustainable finance. The
closest analysis to ours is by Görgen et al. (2020), who construct a carbon risk factor using stock return
differences between a group of “brown” and “green” firms around the world. Their paper is mostly
focused on the pricing properties of the factor and not on transition risk itself. It does not relate stock

returns to any of the mechanisms that are central to our paper, such as short-term vs. long-term risk,
or technology, social, and policy risk. Also related in terms of general subject matter are the studies by
Dyck et al. (2019) and by Gibson et al. (2019), who both explore how environmental, social, and
governance (ESG) motivated investing varies around the world. Notably, neither of these studies
addresses the pricing of carbon-transition risk, which is the focus of our paper.
Next to this cross-country literature there is, of course, a growing country-level climate finance
literature, mostly focused on the U.S. In an early theoretical contribution, Heinkel et al. (2001) have
shown how divestment from companies with high emissions can give rise to higher stock returns. An
early study by Matsumura et al. (2014) finds that higher emissions are associated with lower firm
values. Relatedly, Chava (2014) finds that firms with higher carbon emissions have a higher cost of
capital. More recently, Ilhan et al. (2021) have found that carbon emission risk is reflected in out‐of-
the‐money put option prices. Hsu et al. (2020) derive and test a model showing that highly polluting
firms are more exposed to environmental regulation risk and command higher average returns. Engle
et al. (2020) have constructed an index of climate news through textual analysis of the Wall Street
Journal and other media and show how a dynamic portfolio strategy can be implemented that hedges
risk with respect to climate change news. Monasterolo and De Angelis (2020) explore whether
investors demand higher risk premia for carbon-intensive assets following the COP 21 agreement.
Garvey et al. (2018) study the effect of changes in direct emissions on stock returns, and Bolton and
Kacperczyk (2021a) find that there is a significantly positive effect of carbon emissions on U.S. firms’
stock returns for both direct and indirect carbon emissions. Among all these studies, the last one is
most closely related given its focus on carbon pricing and the use of similar data sources. Nevertheless,
that paper is mostly focused on carbon pricing and the response of portfolio managers to transition
risk. More fundamentally, because it is solely based on US data that paper is silent on the mechanisms
driving transition risk, which is the central focus of this paper.
Other related studies have explored the asset pricing consequences of greater material risks
linked to climate events and global warming. Bansal et al. (2016) reveal the asset pricing implications
of rising temperatures using an equilibrium framework with an endogenous temperature process
embodied in a standard long-run risk model. Hong et al. (2021) propose an asset pricing model in
which natural disaster mitigation costs are priced in the cross-section of firms. Hong et al. (2019) find
that the rising drought risk caused by climate change is not efficiently priced by stock markets.
The remainder of the paper is organized as follows. Section I outlines the conceptual
framework for our empirical tests. Section II describes the data and provides summary statistics.
Section III discusses the results. Section IV concludes.

I. Conceptual Framework
We begin by outlining a conceptual framework that could account for the presence of carbon-
transition risk for investors in a global economy on the way to decarbonization in the next couple of
decades. The basic concept of carbon-transition risk is meant to capture investor uncertainty with
respect to all the changes companies will be faced with along the expected pathway to carbon net
neutrality. The Net Zero targets that many countries and companies have embraced are anchored
around the current scientific consensus on the need to eliminate global carbon emissions by 2050 to
avoid increases in average temperatures of more than 1.5C relative to pre-industrial levels, that would
pose a threat to human existence.
We illustrate the formal link between global emissions and temperature changes in Figure 1.
This IPCC graph provides simulations of various scenarios relating the changes in emissions and
projected temperature outcomes. As is illustrated, to stay within a 1.5C limit, global emissions would
need to go down to zero by 2050, from the level of 420Gt of CO2 as of 2018. Since then, the problem
has become even more dire as the latest IPCC report warns that additional carbon emissions as of
2020 should not exceed a cumulative total of 300Gt of CO2. Achieving this goal involves a complete
transition of the corporate sector from brown to green energy. Such a radical transition will come with
new risks, which we define as carbon-transition risk. Importantly, this risk will materialize irrespective of
the physical damages due to future changes in climate.
INSERT FIGURE 1 ABOUT HERE
This carbon transition risk should be understood in the context of a non-stationary climate
that is evolving in response to the accumulation of carbon emissions in the atmosphere. Because the
underlying economy and climate are non-stationary, carbon transition risk is also a non-stationary risk.
Even if there is no unexpected change in a company’s emissions the carbon premium can change with
time simply because the underlying economy is non-stationary. Also, the marginal effect of emissions
is different depending on how close we are to a potentially cataclysmic tipping point.
The closer we get to exhausting the carbon budget the worse any marginal emissions will be.
The transition to a net-zero economy involves a finite time frame. Thus, for the same level of
emissions, coming closer to the end date (say, 2050) is going to be riskier for a given company because
of the increasing pressure to eliminate emissions. That is why the premium is likely to be rising over
time even if a company’s level of emissions does not change. Of course, this does not necessarily mean
that the carbon premium will rise steadily over time. A more plausible scenario could be an abrupt
unexpected downward repricing of brown assets or upward repricing of green assets.

From an asset pricing perspective, we can split carbon-transition risk into two separate
sources: risks tied to cash flows and risks associated with changes in discount rates. The cash-flow
channel concerns all the risks related to the cost of decarbonization, stranded assets, and technological
shocks. Further, these adjustment costs and the speed at which they materialize are affected by the
degree of climate policy tightness, which itself is uncertain. Another amplifying effect works through
capital expenditures, which are required to refit the economy for renewable energy use. The rate at
which these capital expenditures are made over the next decades is difficult to predict. Even if one
can predict the relative vulnerabilities of certain industries, cash-flow outcomes as well investors’
beliefs for individual firms are far from certain. Take the auto industry. All car manufacturers are now
scrambling to switch to Electric Vehicles (EV). Except for Tesla and new EV entrants, their market
values have taken a beating (another way of saying that there is a carbon premium on their stocks).
Which of these companies will successfully transition to 100% EVs is difficult to say.
There are no models for the energy transition that can be readily applied to capture carbon-
transition risk. However, equilibrium models in which technological risk is priced as in Kogan and
Papanikolaou (2014) and Hsu et al. (2020) are helpful reference points to guide the analysis of carbon-
transition risk. In addition, the asset-pricing model of Hong et al. (2021), which links natural disaster
mitigation costs to asset prices in the cross-section of firms could be applied to determine the impact
on firm valuation of expected future carbon-transition costs. Other helpful related frameworks are the
equilibrium models with uncertainty about policy changes of Bloom (2009) and Pastor and Veronesi
(2013). The basic prediction from these models is that risk-averse investors require compensation for
holding assets that are exposed to carbon-transition risk, so that in equilibrium firms with greater
exposure to carbon-transition risk offer higher expected returns. Note that the same prediction would
obtain if investors simply developed a distaste for brown companies. These investors would require
compensation for holding their noses so to speak, so that brown companies would also offer higher
returns even if there is no divestment in equilibrium.
The carbon premium can also be affected by changes in discount rates and investor
expectations about carbon-transition risk. An important aspect of investor preferences and
expectations is how the prevailing socio-economic environment shapes investors’ attitudes and
outlooks towards climate change. In a society that values protection of the environment and
combatting climate change one should expect that investors will demand greater premia for holding
assets associated with high carbon emissions. The role of social preferences works in a similar way as
specialized, incomplete, information in the equilibrium models of Merton (1987), Pastor et al. (2021),
or Pedersen et al. (2020), which generate higher risk premia driven by limitations imposed on investors’
effective investment opportunity sets. This discount rate channel is different from the categorical
10

divestment channel as in the “sin stock” literature (Hong and Kacperczyk, 2009). The main difference
is that it involves an intensive margin adjustment, with investors demanding higher compensation for
holding assets with greater exposure to carbon-transition risk, rather than an extensive margin
adjustment by a fraction of categorical divestors. Of course, both discount rate and divestment
channels could be present in practice. Our findings of a significant carbon premium in all sectors, not
just in the coal, oil, and gas sector, suggests that the discount rate channel is an important factor and
that carbon risk premia are not just caused by divestment.
Each of these different channels are plausible drivers of carbon transition risk. Determining
their relative importance is largely an empirical question. Also, determining the size of the premium
associated with carbon-transition risk is an empirical matter. Our empirical analysis aims to provide a
quantitative assessment of each channel. Following Bolton and Kacperczyk (2021a), we use firm-level
carbon emissions as proxies for the relative exposure of a company to carbon-transition risk. We
distinguish between the level of emissions, which indicates the firm’s distance from a net zero-
emission target (a measure of long-term risk), and the growth rate of emissions, which indicates the
rate at which a company is decarbonizing (a measure of short-term risk). Firms that keep increasing
their emissions may be seen as riskier due to their growing future decarbonization challenge. In this
respect, carbon emissions are a state variable that investors care about, and increasingly so, just as
investors care about vulnerability to supply bottlenecks, commodity price changes, etc. In our
empirical tests, we use the cross-sectional variation in both measures to characterize differences in
corporate exposures to carbon-transition risk. Interestingly, we find that long-term and short-term
carbon-transition risk are not highly correlated at the firm level.
Carbon emissions are plausibly a time-dependent state variable. The same level of emissions
in year t does not reflect the same conditions as in year t-1 or year t+1. The reason is that any year that
passes brings a firm closer to the net zero target deadline. If the level of emissions in year t remains
the same as in year t-1 this means that the firm faces a steeper decarbonization challenge in year t than
it did in year t-1, as Figure 2 below illustrates. Therefore, investors’ perception of carbon transition
risk evolves as they update their information about a firm’s year-to-year decarbonization progress.
The most recent carbon emissions data reflects investors’ best assessment of the decarbonization
effort their firm faces going forward. Given that the underlying context evolves over time, this means
that the information contained in the emissions of year t-1 is superseded by the emissions of year t as
they are gradually revealed. We illustrate this logic in Figure 2 below.
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The figure displays the level of emissions E in years t-1 and t. The level of emissions sets the
pathway to net zero by year T. When investors observe the new level of emissions for year t, the
information contained in the previous year’s emissions Et-1 is obsolete because it no longer informs
investors about the transition risk reflected in the new pathway starting in year t. This observation
suggests that the news effect in the emissions in any given year should dissipate over time, as investors
gradually learn about the likely new yearly emission numbers. Therefore, any carbon premium we may
identify is likely to be linked to a transitory firm-level state variable. This firm-level state variable can
be transitory even if yearly emissions are highly persistent. As the figure shows, the level Et is almost
the same as the level Et-1, yet the pathway gets steeper as time passes. What investors care about is the
transition risk embedded in the pathway to net zero going forward; the slope of this pathway changes
even if the level of emissions remains unchanged. The level of emissions of course can itself change,
but as we show, this change is quite volatile and hard to predict. As a result, there is a lot of news
content in the latest emission numbers.
A strength of our empirical analysis is its global reach. Given that firms in different countries
may face different carbon transition paths, it is natural to explore whether such variation in geographic
location matters for asset prices. From the perspective of investors pricing transition risk, what
matters is the ability to share risk with other investors as well as across different assets. Under the
hypothesis of fully integrated markets and a global representative investor, one should expect the
pricing of transition risk not to vary much across different locations. On the other hand, under
(partially) segmented markets, one would expect to see clear differences in pricing across different
locations. This heterogeneity could result from different policy regimes, different technological
progress, or different perceptions of the threat of climate change. Thus, our empirical tests should
shed useful light on the degree of market integration in pricing carbon risk.
In the rest of the paper, we build on the broad notions above and test them empirically using
a large cross-section of publicly listed firms from around the world.
II. Data and Sample

Our primary database matches two data sets by respectively Trucost, which provides annual
information on firm-level carbon and other greenhouse gas emissions, and FactSet, which assembles
data on stock returns and corporate balance sheets. We performed the matching using ISIN as a main
identifier. In some instances, in which ISIN was not available to create a perfect match, we relied on
12

matching based on company names.7 Finally, when there are multiple subsidiaries of a given company,
we used the primary location as a matching entity. The ultimate matching produced 14,468 unique
companies out of 16,222 companies available in Trucost. They represent 77 countries. Among the
companies we were not able to match, more than two thirds are not listed, and the remaining ones are
small and are not available through Factset. The top three countries in terms of missing data are China,
Japan, and the United States. Our sample covers more than 98% of publicly listed companies (in terms
of their market capitalization) for which we have emissions data, representing 80-85% of the market
value of all publicly listed firms available in Factset. Since Trucost samples firms fairly uniformly across
different industries our sample ought to cover as a first approximation the value-weighted emissions
of the Factset universe. We augment this data with country-level variables from the World Bank,
Germanwatch (the provider of the global climate policy index and the climate risk index, CRI), Morgan
Stanley (for the MSCI world index data), and IBES (for analyst earnings growth forecasts).
A. Data on Corporate Carbon Emissions

The Trucost EDX firm-level carbon emissions database follows the Greenhouse Gas Protocol
that sets the standards for measuring corporate emissions.8 The Greenhouse Gas Protocol
distinguishes between three different sources of emissions: scope 1 emissions, which cover direct
emissions over one year from establishments that are owned or controlled by the company; these
include all emissions from fossil fuel used in production. Scope 2 emissions come from the generation
of purchased heat, steam, and electricity consumed by the company. Scope 3 emissions are caused by
the operations and products of the company but occur from sources not owned or controlled by the
company. These include emissions from the production of purchased materials, product use, waste
disposal, and outsourced activities. The Greenhouse Gas Protocol provides detailed guidance on how
to identify a company’s most important sources of scope 3 emissions and how to calculate them. For
purchased goods and services, this basically involves measuring inputs, or “activity data”, and applying
emission factors to these purchased inputs that convert activity data into emissions data. Trucost
upstream scope 3 data is constructed using an input-output model that provides the fraction of
expenditures from one sector across all other sectors of the economy. This model is extended to
include sector-level emission factors, so that an upstream scope 3 emission estimates can be
7 After standardizing the company names in FactSet and Trucost, respectively, we choose companies whose names have
a similarity score of one based on the standardized company names.

8 See https://ghgprotocol.org.
13

determined from each firm’s expenditures across all sectors from which it obtains its inputs (see
Trucost, 2019).9
The Trucost database reports all three scopes of carbon emissions in units of tons of CO2
emitted in a year. We first provide basic summary statistics on carbon emissions across our 77
countries aggregated up from the firm-level emissions reported by Trucost. Table I reports the
country-level distribution of firms in our sample and various measures of emissions broken down into
scope 1, scope 2, and scope 3. We consider the average total yearly emissions in tons of CO2 equivalent
per firm in each country (S1TOT, S2TOT, and S3TOT), the (winsorized at 2.5%) yearly percentage
rate of change in emissions (S1CHG, S2CHG, and S3CHG), and the total yearly emissions by country
(TOTS1, TOTS2, and TOTS3).
INSERT TABLE I ABOUT HERE
The largest country by number of observations is obviously the United States, but remarkably
it only represents around 19.8% of total observations, with Japan a close second with 14% of
observations, and China third with around 8.2% of observations. Importantly for our analysis, Table
I highlights that the majority of listed firms in our sample is not concentrated in these three large
economies. In aggregate, the entire population of countries in our sample produces a staggering 11.81
billion tons of scope 1, 1.62 billion tons of scope 2, and 7.99 billion tons of scope 3 emissions per
year. The three biggest contributors in terms of total carbon emissions produced are China producing
2.91 billion tons of scope 1 emissions per year, followed by the U.S. with 2.33 billion, and Japan
contributing 980 million. The same three countries also dominate scope 2 and scope 3-emissions,
except that the ranking changes with U.S producing 2.1 billion of scope 3 emissions, followed up by
Japan with 1.25 billion, and China with 841 million tons of CO2.
The global production of emissions does not necessarily reflect the contribution of each firm
to the total, as the relative sizes of countries vary. In fact, the top three countries in terms of scope 1
emissions per firm are Russia, the Netherlands, and Greece, with their respective emission levels of
10.1 million, 5.6 million, and 4.2 million tons of CO2 per year. An average Russian firm also leads the
rankings in terms of scope 3 emissions with 6.1 million tons of CO2, followed by Germany and France,
with respective numbers of 3.4 and 2.9 million tons of CO2. A slightly different picture can be painted
when we compare firm-level emission intensities. The most intense countries in terms of scope 1
9 Downstream scope 3 emissions, caused by the use of sold products, can also be estimated and are increasingly reported
by companies. Trucost has only recently started assembling this data (see Trucost, 2019); given its much shorter time span,
we do not include this data in our study.
14

emissions include Estonia, Morocco, and Peru. Among the largest countries, Russia, India, and China
score relatively high, while France, Japan, and the United Kingdom score relatively low.
Another striking observation is that carbon emissions are growing in most countries
throughout our sample period. The country with the highest growth rate in scope 1 emissions is
Mauritius, with an average yearly growth rate of 45%. The second largest is Bulgaria with a 35% growth
rate, and the third, fourth, and fifth largest are, respectively, Iceland, Kenya, and Lithuania. All these
five countries have witnessed rapid GDP growth over our sample period. Among the largest
economies, the ones with the highest growth rate in emissions are China with nearly 18%, the Russian
Federation with 16%, the United States with 7.9%, and Germany with 7.1% growth rates. Among the
countries with the lowest growth rates in scope 1 emissions are, remarkably, Saudi Arabia, with a
negative 10.5% growth rate (this may reflect the fact that a lot of companies have gone public over
our sample period, lowering the average per-company scope 1 emissions), Luxembourg with a
negative 33% growth rate, and Jordan with a minus 7.5% growth rate. When it comes to the growth
rate in scope 3 emissions, some of these rankings are reversed, reflecting the fact that some countries
increasingly rely on imports whose production generates high emissions. Thus, Saudi Arabia has a
4.3% growth rate in scope 3 emissions.
In Figures 3 and 4, we further represent the detailed cross-country variation in total emissions
over two equal-length time periods, which classify countries into four categories by their performance
in these metrics. The left panel of each figure represents scope 1 emissions, the middle panel scope 2
emissions, and the right panel scope 3 emissions. As can be seen in Figure 3, the countries with the
highest total average yearly emissions are first, the countries with the highest GDP, second the
countries with the largest populations, and third the largest commodity exporting countries. Important
exceptions are Sweden, which has the lowest emissions among developed countries, Iceland, and the
Czech Republic. Importantly for our analysis, there is considerable cross-country variation in total
emissions. To the extent that the carbon premium reflects concerns about the level of emissions, we
expect to see considerable variation in the premium across countries.
We further show how the performance of countries has changed from the first half period of
our sample, from 2005 to 2011, to the second half period, from 2012 to 2018. The most noteworthy
changes are the deterioration in total emission performance of Latin America, the Russian Federation,
Turkey, and Australia.
Interestingly, however, there is little correlation between a country’s levels of total emissions
and average per-firm emissions, as can be seen in Figure 4, which represents the cross-country
variation in average per-firm emissions. Among the worst performers in the world in per-firm
15

emissions are the United States, Saudi Arabia, Argentina, Colombia, China, the Russian Federation,
India, Japan, and the European Union (excluding the U.K.).
In Table II, Panel A we report summary statistics on per-firm carbon emissions in units of
tons of CO2 emitted in a year, normalized using the natural log scale. Thus, the log of total scope 1
emissions of the average firm in our sample (LOGS1TOT) is 10.32, with a standard deviation of 2.95.
Note that the median number is the largest for scope 3 emissions (LOGS3TOT), indicating that most
companies in our sample are significantly exposed to indirect emissions. To mitigate the impact of
outliers we have winsorized all growth measures at the 2.5% level. In Panel B, we report the
correlations between the total emissions variable and the emission percentage change variable for the
three different categories of emissions. Interestingly, the correlation coefficients are quite low,
indicating that the emission change variable reflects a different type of variation in the data.
INSERT TABLE II ABOUT HERE
In Panel C, we study the autocorrelation patterns of both levels and rates of change of
emissions. Formally, we estimate the regression model of annual emissions measures with their
respective one-year lags only (in columns 1-3), and year-month and firm fixed effects (in columns 4-
6). We double cluster standard errors by firm and year. The results indicate a significant persistence of
emission levels, even after controlling for fixed effects, and almost no persistence in the rates of change
measure. These results provide additional empirical support for emission levels as a metric of long-
term transition risk and emission changes as a metric of short-term transition risk.
Finally, Panel D provides summary statistics on stock returns and several control variables we
use in our subsequent tests. The dependent variable, RETi, t, in our cross-sectional return regressions
is the monthly return of an individual stock i in month t. We use the following control variables in
our cross-sectional regressions: LOGSIZEi,t , which is given by the natural logarithm of firm i’s market
capitalization (price times shares outstanding) at the end of year t; B/Mi,t , which is firm i’s book value
divided by its market cap at the end of year t; LEVERAGEi,t, which is the ratio of debt to book value
of assets; momentum, MOMi,t , which is given by the average of the most recent 12 months’ returns
on stock i, leading up to and including month t-1; capital expenditures INVEST/Ai,t, which we
measure as the firm’s capital expenditures divided by the book value of its assets; a measure of the
firm’s specialization, HHIi,t, which is the Herfindahl concentration index of the firm with respect to
its different business segments, based on each segment’s revenues; the firm’s stock of physical capital,
LOGPPEi,t, which is given by the natural logarithm, of the firm’s property, plant, and equipment; the
firm’s earnings performance ROEi,t , which is given by the ratio of firm i’s net yearly income divided
16

by the value of its equity; the firm’s idiosyncratic risk, VOLATi,t, which is the standard deviation of
returns based on the past 12 monthly returns; and, MSCIi,t, which is an indicator variable equal to one
if a stock i is part of the MSCI World index in year t, and zero otherwise. SALESGRi,t is the annual
growth rate in firm sales, LTGi,t is the analyst forecasts of the long-term earnings growth for firm i at
time t, averaged across all analysts. To mitigate the impact of outliers we winsorize B/M,
LEVERAGE, INVEST/A, ROE, MOM, and VOLAT at the 2.5% level, and LTG at the 1% level.
In Panel D, we also summarize all the relevant variables that we use in our cross-sectional
analysis. These include measures related to technological progress, energy intensity, socio-economic
development, policy environment, and physical risk. We define each one explicitly in their respective
tests in Section 4. The average firm’s monthly stock return equals 1.08%, with a standard deviation
of 10.23%. The average firm has a market capitalization of $66 billion, significantly larger than the size
of the median firm in our sample, which is $15 billion. The average book-to-market ratio is 0.57, and
average book leverage is 23%. The average return on equity equals 11.1%, slightly more than the
median of 10.87%.
Table III provides summary statistics by year for the total number of firms in our sample in
any given year, and the level and percentage change in emissions for all three SCOPE categories. Note
the large increase in coverage after 2015, when the number of firms jumps from 5427 in 2015 to 11961
in 2016. This is because Trucost has been able to substantially expand the set of firms for which it
collects data on carbon emissions from 2016 onward. For most our empirical tests we rely on cross-
sectional variation in the data, so that we are less exposed to a possible structural break in the data in
2016. Moreover, many of our results hold when we restrict our sample to legacy firms, that is, those
present in the sample prior to 2016.
We also report the distribution of firms by industry in Table A.1, using the six-digit Global
Industry Classification (GIC-6). Our global database should reflect a greater proportion of firms in
manufacturing and agriculture than is the case in developed economies. This is indeed what is reflected
in Table IV, with 580 companies in the machinery industry, 530 in the chemicals industry, 520 in the
electronic equipment, instruments and components industry, 506 in metals and mining, and 440 food
products companies. In the services sector the largest represented industries are banking with 679
banks and real estate, with 619 companies (some of which are also engaged in construction and
development).
INSERT TABLE IV ABOUT HERE
Finally, we report summary statistics on the main determinants of carbon emissions in Table
IV. We regress in turn the log of total firm-level emissions and the percentage change in total emissions
on the following firm-level characteristics: LOGSIZE, B/M, ROE, LEVERAGE, INVEST/A, HHI,
17

LOGPPE, and MSCI. To allow for systematic differences in correlations across countries and over
time, we include year-month fixed effects and country fixed effects, so that our identification comes
from within-country variation across firms. In columns 4-6, we further include industry fixed effects
(following the classification of Trucost10) to account for possible differences across industries. The
results are also robust to using GIC 6 codes though these are less desirable because they may capture
companies with different emission profiles.
In Panel A, we show considerable variation across industries in the effect of these variables
on emissions (for example, the R-square increases from 0.696 to 0.779 when we add industry fixed
effects to the regression for LOGS1TOT). Accordingly, we focus on the regressions with industry
fixed effects and note that total emissions significantly increase with the size of the firm (in particular
if it is a constituent of the MSCI World index), its book to market ratio, its leverage, and its tangible
capital stock (PPE). This is altogether not surprising, to the extent that emissions are generated by
economic activity, which is proportional to the size of the firm. Somewhat surprising is the strong
effect of leverage. One possible explanation is that firms with higher emissions may anticipate future
drop in profitability due to transition risk and as a result take more leverage. Interestingly, investment
has a strong negative effect on emissions, suggesting that new capital vintages are more carbon
efficient. Industry specialization (a high HHI) also has a negative effect on emissions, perhaps because
non-specialized conglomerates tend to be larger. Alternatively, conglomeration can reflect a firm’s
response to potential costs of high emissions in a particular sector.
III. Results
We organize our discussion into three subsections. The first subsection reports results on the
pricing of carbon-transition risk throughout the world, the second reports results related to specific
drivers of carbon-transition risk, and the third subsection briefly discusses how carbon-transition risk
may be gradually priced in as the underlying economy is transitioning away from fossil fuels.
A. Pricing Carbon-Transition Risk throughout the World

In this section, we present our main findings on the pricing of carbon-transition risk. We
begin by reporting findings for the full sample of firms. We then proceed to show how the carbon
premium is distributed across geographic locations.
A.1. Empirical Specification
10 These roughly correspond to a three-digit SIC classification.

18

Our analysis of carbon-transition risk centers on two different cross-sectional regression
models relating individual companies’ stock returns to carbon emissions. Rather than a factor-based
model, we take a firm characteristic-based approach along the lines of Daniel and Titman (1997). This
approach is particularly well suited given the rich cross-sectional variation in firm characteristics in
our sample.11 As shown in Bolton and Kacperczyk (2021a), the following characteristics are
particularly relevant when using carbon emissions as the main sorting variable: firm size, book-to-
market, leverage, capital expenditures over assets, property plant and equipment, return on equity,
sales growth, sectoral diversification, and a measure of respectively stock price momentum and
volatility. This characteristics-based approach also allows us to take full advantage of fixed effects
along time, country, and industry dimensions. Further, we can better account for potential
dependence of residuals by using a clustering methodology. Finally, the advantage of taking a
characteristics-based approach is that we do not need to take a stance on the underlying asset pricing
model. One basic conceptual difficulty with the choice of asset pricing model in the context of a
complex pricing problem such as climate change risk, is that such a model has not yet been formulated.
However, since we do not take a risk-factor approach, we cannot explore the presence of a “carbon
alpha” or of any mispricing of carbon-transition risk. Our aim is more limited: to provide a
comprehensive picture of the cross-sectional variation in stock-level returns throughout the world.
Stated differently, our approach is to identify a company’s “carbon beta”.
We begin by linking companies’ monthly stock returns to their corresponding total emissions
and other characteristics, all lagged by one month. This regression model reflects the long-run,
structural, firm-level impact of emissions on stock returns. Taking absolute carbon neutrality as a
benchmark, one can think of this measure as a rough proxy for the quantity of risk a firm is exposed
to at a given point in time. Specifically, we estimate the following model:
"#$!,# = &$ + &% ($)$ #*+,,+-.,)!,#&% + &' 0-.12-3,!,#&% + µ# + e!,# (1)
where !"#!,# measures the stock return of company i in month t and TOT Emissions is a generic term
standing for respectively LOGS1TOT, LOGS2TOT, and LOGS3TOT. The vector of firm-level
controls includes the firm-specific variables LOGSIZE, B/M, LEVERAGE, MOM,
INVEST/ASSETS, HHI, LOGPPE, ROE, and VOLAT.
11 The risk factor-based approach has been a popular method to measure risk premia in a single-country, but in a fully
global study, such as this one, this approach is problematic because of the difficulties in specifying appropriate factor-
mimicking portfolios for a large number of countries with limited data, and because of cross-country comparability issues.
19

Second, we relate companies’ growth in in annual total emissions to their monthly stock returns
by estimating the following cross-sectional regression model:
"#$!,# = &$ + &% D($-1&3 #*+,,+-.,)!,#&% + &' 0-.12-3,!,#&% + µ# + e!,# (2)
The percentage change in total emissions (S1CHG, S2CHG, and S3CHG) captures the short
run impact of emissions on stock returns. In particular, changes in total emissions reflect the extent
to which companies load up on, or decrease, their material risk with respect to carbon emissions. From
a transition perspective, this measure captures the position of a firm on a long-term path towards
carbon neutrality. In this respect, it is complementary to the long-term objective captured by the level
of emissions.
We estimate these two cross-sectional regressions using pooled OLS. In both models, we also
include country fixed effects, as well as year-month fixed effects. Hence, our identification is cross-
sectional in nature. In some tests, we also include the same set of industry fixed effects as in Table
IV to capture within-industry variation across firms. In all the model specifications, we double cluster
standard errors at the firm and year levels, which allows us to account for any cross-firm correlation
in the residuals as well as capture the fact that some control variables, including emissions, are
measured at an annual frequency. Our coefficient of interest is &% .
A.2. Evidence from the United States and China

We begin our analysis by comparing the results for our regression models in the two
economies with the largest emissions, China and the U.S. We report the results in Table V. These
two economies differ in fundamental ways, and one would expect the carbon premium to reflect
fundamental differences in the level of economic and financial development, and in the legal and
political regimes. Yet, we find that the results for scope 1 emissions are surprisingly similar, which
suggests that firm-level variation in emissions may be more relevant for transition risk than are the
differences between the two countries. Specifically, once one controls for industry and time, as well
as a battery of firm characteristics, firm-level differences in LOGS1TOT generate a highly significant
carbon premium of similar size both in China (.069) and in the U.S. (.071), or equivalently an
annualized value of 1.18% and 0.95% per one-standard-deviation change in total emission levels in
20

each country.12 Using a slightly shorter period (2005-2017), Bolton and Kacperczyk (2021a) find that
the premium for U.S. companies is slightly lower. Here we find a higher premium estimated over the
time interval 2005-2018. This higher premium is in line with the findings Bolton and Kacperczyk
(2021a) that the carbon premium is rising over time, especially after the Paris agreement of 2015.
INSERT TABLE V ABOUT HERE
The finding of a firm-level carbon premium for listed Chinese companies is novel and
surprising. Although China in many ways has been a pioneer in the promotion of renewable energy,
it does not stand out for its ESG institutional investor constituency, nor for its institutional investors’
focus on carbon emissions. Yet, financial markets in China do price in a carbon premium at the firm
level, both when it comes to direct emissions as well as indirect emissions. The magnitude of the
premium is slightly lower relative to that in the U.S. The quantitative similarities in the results across
the two economies are slightly weaker for the carbon premium associated with the growth in
emissions, as can be seen in Panel B. Still, for both countries, the premium is highly statistically
significant, though the magnitudes of the premium for China are 10-20% higher. The latter finding
could be due to the fact that a smaller fraction of companies in China discloses their emissions and to
the generally higher growth rate in emissions of Chinese companies.
A.3. Unconditional Results
We next turn to the estimation of the model for the full sample of 77 countries. Relative to
our previous specification, we also include country-fixed effects to account for country-specific
variation in the data. We report the results in Table VI. In columns 1-3, the estimates are for
regressions without industry adjustment; in columns 4-6, we include industry fixed effects. In Panel
A, we report the results for the level of carbon emissions. Throughout all specifications, we find a
positive and mostly statistically significant effect of total emissions on individual stock returns,
consistent with the hypothesis that higher-emission firms are riskier. Interestingly, when we do not
control for industry the economic significance of the carbon premium at the firm level for total scope
1 emissions is much smaller. One possibility is that some firms (or industries) with high emissions
have experienced unexpectedly low returns. One example could be the recent devaluation of the
energy sector following the decline in commodity prices. For that reason, it seems natural to focus on
12 Throughout the paper, whenever we refer to a one-standard deviation movement, we calculate standard deviations of a
given variable, taking into account the impact of all other controls in the model, including fixed effects. This is equivalent
to calculating the standard deviation of the residual from the predictive model of each emission measure in the model.
21

within-industry variations in carbon emissions. Indeed, when we add an industry fixed effect, the
premium is large and highly significant. A one-standard-deviation increase in LOGS1TOT across
firms, equal to 1.4, is associated with a return premium of 1.06% per year. These results indicate that
variations in stock returns across industries swamp variations in firm-level emissions within a given
industry. In untabulated results, we have also included country fixed effects interacted with year-
month fixed effects, and industry fixed effects interacted with year-month fixed effects, to account
for any demand-side shocks affecting different countries and industries, respectively. The estimated
risk premia from these models are only slightly smaller than those reported here, which suggests that
our results are not affected by transitory, business-cycle shocks but are more reflective of permanent
shocks, such as transition risk.
INSERT TABLE VI ABOUT HERE
Note that the coefficient of LOGS3TOT is highly significant in the regressions without and
with industry fixed effects. It is also economically significant, as a one-standard-deviation increase in
LOGS3TOT is associated with a return premium of 1.81% for the specification without industry fixed
effects, and 1.97% with the fixed effects.
The results with respect to the growth in carbon emissions are all highly significant and are
not affected at all by the inclusion of industry fixed effects, as can be seen in Panel B. In the model
with industry fixed effects, per one-standard-deviation change in scope 1 and scope 3, the
corresponding return premia amount to 2.17% and 3.38% per year, slightly smaller in magnitude to
the effects we observed for the levels of emissions. Of course, statistically speaking, taking differences
in emissions is close to including firm fixed effects in the model with levels of emissions.13
Our conceptual framework posits that the two different emission measures proxy for two
types of transition risk: a short-term and long-term risk component. A natural question is to what
extent these two measures capture independent variation in stock returns. Evidence in Table II shows
that they are largely independent of each other given the relatively small correlations. We test this
relative independence using a return regression model that jointly includes both measures. We report
the results in Panel C. In columns 1-3, we present the results with country and time fixed effects and
13 We have also explored the robustness of our results to different cut-offs for our measure of emission changes.
Specifically, we have considered measures that are winsorized at the 1% level. The results, reported in Table A.2 of the
Online Appendix, are broadly consistent with those we obtain in the baseline specification. We note that results for
unwinsorized metrics, even though statistically significant, would be less desired because of significant outliers in the right
tail of the empirical distribution.
22

in columns 4-6 we add industry fixed effects. We find that in the joint model both measures of
emissions retain their positive coefficients and economic significance, which further confirms our
starting premise that they capture economically different sources of risk.
In another test, we assess the predictions of our model with respect to carbon intensity, a measure
of firms’ total emissions scaled by their revenues. This measure has been the focus of other research
on investment strategies based on discriminating between ‘green’ vs. ‘brown’ firms, and on asset
managers’ exclusionary screening policies (e.g., Garvey et al. 2018, and Cheema-Fox et al. 2021), but
when it comes to carbon transition risk, carbon intensity does not directly capture the transition effort
of a firm to attain net zero. As we have pointed out in the introduction, a reduction in emission
intensity does not necessarily correspond to a reduction in total emissions. The level of emissions is a
more direct proxy for carbon transition risk exposure than emission intensity. Dividing by sales
revenue introduces noise: when emission intensity changes it could be because of a change in sales
revenue or because of a change in the level of emissions. One potential concern with linking emission
levels to stock returns could be that, if variations in emissions are driven entirely by variations in the
firm’s operating activities, emission levels could be a proxy for sales revenues, so that the effect of
emissions on stock returns could simply reflect the effect of sales revenue on stock returns. Note,
however, that we do control for firm size, so that the effect of size on emission levels is accounted
for. With a noisier proxy for carbon transition risk exposure, one should expect a less significant result.
When we link carbon intensity to stock returns, we indeed find no statistically significant relationship.
These results are presented in Table A.3 of the Online Appendix.
As an additional robustness check we also associate carbon emissions with annual returns. The
results are reported in Table A.4 and corroborate our main findings relating carbon emissions to
monthly returns.
The overarching conclusion from this part of our analysis is that firm-level global stock returns
reflect firm-level variation in both total emissions and growth in total emissions, which indicates that
investors price carbon-transition risk both from a short-term and long-term perspective.
A.4. Book-to-Market Ratios

It is well known that stock returns are noisy proxies for expected returns. It is sometimes
possible to get more precise measures of expected returns based on analyst forecasts. However, a
major challenge with this approach is that (1) analyst forecasts are only available for a relatively small
subset of global stocks; (2) analyst forecasts may be biased because of industry incentive structures;
and (3) the metric of implied cost of equity critically depends on the postulated valuation model.
23

As an alternative, we look at the pricing of carbon emissions from a different perspective and
relate our firm-level carbon emission measures to book-to-market ratios, which tend to be more stable
over time and are available for a large set of firms. Looking at book-to-market ratios helps us to better
distinguish the explanation of our results as one based on required expected returns vs. one due to
luck. Accordingly, we estimate the following regression model:
4567!,# = &$ + &% ($)$ #*+,,+-.,)!,# + &' 0-.12-3,!,#&% + µ# + e!,# (3)
Our dependent variable is the natural logarithm of the firm book-to-market ratio, LNBM. Our control
variables include MSCI, MOM, VOLAT, and SALESGR. In addition, we use one and two year-ahead
measures of SALESGR to proxy for future cash-flow growth and LTG to proxy for long-term
earnings growth forecasts. Finally, in all specifications, we include country and year-month fixed
effects. Some variants of our tests also include industry fixed effects. As before we double cluster
standard errors at the firm and year level. We present the results in Table VII.
INSERT TABLE VII ABOUT HERE
In Panel A, the main independent variables of interest are LOGS1TOT, LOGS2TOT, and
LOGS3TOT. Consistent with our hypothesis of the presence of carbon-transition risk, we find that
companies with high emissions have higher book-to-market ratios. The effects are statistically
significant in the model that does not account for industry fixed effects, in columns 1-3. As before,
the magnitudes become even stronger when we add industry fixed effect. In terms of economic
significance, a one-standard-deviation increase in cross-sectional scope 1 emissions is associated with
a 13.2% increase in book-to-market ratios. The results for scope 2 and scope 3 emissions are
comparable in magnitude.
A natural question is whether these magnitudes are comparable to those obtained from the
return regressions. To answer this question, we take a simple Gordon growth model with expected
growth rate of 4% and expected return of 12% (these numbers roughly correspond to an average
stock) and ask how much of an increase in expected returns is required to get a 13% lower valuation
for high carbon emission stocks. For these parameters, this would imply a number that is slightly less
than a 1.4% excess return. This value is slightly higher in magnitude to that estimated using our return
regressions, but in general it falls within a one standard error bound of the return coefficient. Hence,
statistically speaking, the two numbers are not very different from each other.
In Panel B, we consider the specification with the growth in emissions as the main independent
variable. We estimate the same empirical model as before. As before, we find a strong positive effect
24

of changes in emissions on the log-book-to-market variable. The effect is statistically and economically
highly significant both in the model without and with industry fixed effects.
We note that in the above tests our sample size is naturally restricted due to data limitations
imposed by the computation of LTG. To ensure that our results are not spuriously driven by the
smaller sample, we repeat our analysis using the model without LTG, but with a sample size that is
comparable to that used in our return models. We report the results in Table A.5 of the Internet
Appendix. In these large data, we find the effects that are statistically more significant but broadly
consistent in terms of their magnitudes with our baseline results.
Overall, we conclude that our baseline results on stock returns are unlikely to be explained by
unexpected returns (or noise therein). They are more consistent with a systematic repricing of assets
with different levels of emissions and changes thereof. Hence, in the remaining parts of the paper we
continue with the specifications with stock returns as a main dependent variable.
A.5. Information Observability and Carbon Premium

An important aspect of any risk premium analysis concerns the measurability of information
on which investors condition their investment choices. While some elements of our analysis are typical
of any standard approach in the literature, others are unique to the context of carbon transition risk.
As we have noted, progress in the transition is reflected in the rate of change in emissions, which is
why we should expect a priori transition risk to be tied to both level and rate of change in emissions.
Such horizon effects should be present even over shorter time spans. Hence, one should not expect
the risk premium to be independent of when we observe emissions relative to stock prices. This is an
important difference with respect to classical asset pricing, which essentially presumes a stationary
world and stochastic general equilibrium.
To ensure that all the conditioning information is in investors’ information sets at the time of
the realization of returns, we have performed several robustness checks with different lags of emission
information, since investors’ information sets are not perfectly observable. We have considered lags
of respectively 3 months, 6 months, and 12 months between the end of the year for which emissions
are reported and the month when returns are realized. Using the different lags, we estimate the models
in equations (1) and (2). We report the results in Panels D and E of Table VI for the levels and changes
of emissions, respectively. In most specifications the premium for the level of emissions remains large
and significant for the different lags. In turn, the premium based on emission changes is positive and
significant for up to six months but becomes insignificant after 12 months.
These results raise two questions. First, why does the premium persist for such a long period?
And second, why does it disappear after 12 months? Our answer to the first question is that investors
25

have limited attention and do not immediately absorb all the new information about carbon emissions
at the firm level (Kacperczyk et al., 2016). The information about carbon emissions for year t is
gradually reflected in returns over the year. A related way to micro-found the friction would be a
model of slow-moving capital (Duffie, 2010). Our answer to the second question is that carbon
emission numbers become stale after a while, and after a year the information in these numbers is
subsumed in the new numbers. Interestingly, when we compare the effect of lagging emissions on
returns for respectively levels and changes, we find that the former retains information longer than
the latter. The rate of change in emissions is naturally less persistent and conveys more transitory
information. In other words, the news component is larger for the rate of change in emissions
numbers than for the emission levels numbers.
In our benchmark specification, we measure carbon emissions one month before the returns
are realized. The reason for this choice is largely dictated by the horizon effects and information
staleness discussed above. We also note that investors can obtain more accurate forecasts of future
cash-flow risk related to carbon emissions from industry and firm characteristics. The more up to date
their information about firm characteristics is, the more accurate are their forecasts of emissions and
returns, which is why basing returns predictions on too long lags for the firm characteristics would
underestimate the true return premium. As an example, if we lag emissions by 12 months, that would
be saying that investors do not condition their forecasts on any updates in firm characteristics for an
entire year. This does not seem plausible. Therefore, we believe that shorter lags, of 1 or 3 months,
are more natural than a 12-month lag.
We have also explored the extent to which emissions are a persistent characteristic. We ask
how different is the effect of emissions on stock returns when we abstract from any news effect
contained in the latest emission numbers? To do this, we replace the actual emission numbers in years
τ < t = 2018 in our sample with emission estimates based on a backward imputation of the emissions
in year 2018, the last year of the sample. We can then determine how different the carbon premium is
when we relate it to emissions that are imputed back in time versus the actual year-by-year emission
numbers. If the premia are similar, this would suggest that emissions in year t are a good statistic for
emissions in years t-τ for all τ < t in our sample. This is indeed what we find and report in Table A.6,
which suggests that carbon transition risk, as proxied by the level of emissions, is a persistent
characteristic when you take out any news effects.
Another important issue is with respect to the delayed availability of emissions numbers from
Trucost. First, the fact that our analysis is based on data from Trucost does not mean that Trucost is
the only source of information on carbon emissions for investors. Investors can acquire information
about corporate carbon emissions from other sources. Indeed, large asset managers like BlackRock or
26

Amundi rely on multiple data sources for carbon emissions that are not all available at the same time.
For example, a lot of firms disclose their emissions first to CDP, data which then is merged into and
combined with other sources by Trucost. Different information that is likely to be highly correlated
with Trucost information (given that all providers use the same data collection protocols) becomes
available at different times. Furthermore, investors are likely to be heterogeneous with respect to
access to information about carbon emissions. Therefore, the information set of investors is likely to
be updated earlier than the information set of the econometrician. In fact, in an additional
(untabulated) test, we explore whether there are announcement returns around the date when Trucost
enters the data on emissions into its database and we find no effect. Stated differently, our analysis is
not meant to identify a trading strategy based on Trucost data; we use this data only as a proxy for
carbon transition risk.
A related concern is about how Trucost gathers and aggregates the data on corporate carbon
emissions: Could the methodology that Trucost uses directly affect the size of the carbon premium?
Trucost reports two types of data, one that is directly taken from corporate reports and another that
is estimated using its own prediction model. Could it be that the estimated emission numbers are
noisy or biased because of the methodology used by Trucost? We find the possibility of a systematic
bias that is correlated with future stock returns unlikely, given the weak evidence of autocorrelation in
stock returns typically found in empirical studies. To evaluate the differences in carbon transition risk,
as they relate to whether the carbon emissions are based on corporate disclosures or are estimated, we
take advantage of information provided by Trucost on how particular emissions data has been
sourced. We define an indicator variable Disclosure if emissions for firm i at time t are based on directly
disclosed information, and zero if they come from an estimate based on a model-based approach. We
amend our return regression by adding this variable and its interactions with our measures of carbon
emissions. We report the results in Table A.7. The results show two effects. First, the level of the
carbon premium is lower for emissions based on directly disclosed data, a finding which is inconsistent
with the uncertainty reduction hypothesis. Second, the premium remains positive and significant for
both types of data, especially in the model with industry fixed effects. Hence, we conclude that the
source of emission data does not alter the qualitative aspects of our results.14
14 In a related paper, Aswani et al. (2021) find that the carbon premium associated with the level of emissions goes to zero
for companies that directly disclose their emissions and suggest that investors may not be pricing carbon risk at all. Our
results differ in that we find a positive premium for both types of emission sources in a sample that includes roughly five
times more firms than in their sample. More importantly, we note that the smaller magnitude of the carbon premium for
27

While our analysis considers different information sets based on monthly frequency, it is
important to note that corporate emissions data from Trucost is provided with annual frequency.
However, the annual measurement of corporate emissions should not imply that our empirical tests
should be cast with an annual frequency for stock returns. Even if data for corporate carbon emissions
are released with annual frequency, investors’ information sets get updated with greater than annual
frequency. It is more plausible that investors’ learning process is continuous, and that more
information gets processed over time. This process can further rationalize the fact that the impact of
emissions gets progressively smaller with an increasing lag between when emissions are available and
when returns are measured.
Finally, a common concern could be that emissions and stock returns are endogenously related
through the company’s production channel. For example, better business opportunities could be
associated with higher sales and could generate both higher emissions and higher realized returns. We
note that this prediction is not borne out in our data. Market value does not increase with higher
emissions (consistent with business opportunities getting better). We find the exact opposite result
that the book-to-market ratio is positively related with carbon emissions. Stock prices are lower rather
than higher for firms with higher levels and higher growth in emissions. Thus, to the extent that
production endogeneity is a concern, the estimates we provide constitute a lower bound on the true
effect of carbon emissions on the risk premium.
A.6. Geographic Distribution

By looking at the geographic distribution of the carbon premium we can assess how our
unconditional results are driven by a particular region. The economics literature on climate change has
emphasized the importance of the spatial distribution of climate policies (Nordhaus and Yang, 1996)
and physical impacts (Cruz and Rossi-Hansberg, 2020). Different regions have different exposures to
climate change as well as different capacities to adapt. With respect to transition risk, one might expect
that a country’s economic development, social norms, or headline risk may be equally important. At
the same time, financial market integration may erase some of the country-level heterogeneity.
directly disclosed emissions is consistent with a model in which firms endogenously decide whether to disclose their
emissions. In this model a benefit for the firm of disclosing emissions is a lower risk premium achieved by lowering the
perceived uncertainty investors face with respect to carbon transition risk. Hence, our evidence is fully consistent with the
hypothesis that investors do price carbon transition risk, but differently for different levels of perceived uncertainty. We
provide an extensive analysis of this economic mechanism in Bolton and Kacperczyk (2021c).
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We evaluate the geographic distribution of carbon-transition risk pricing by comparing four
different regions: North America, Europe, Asia, and Southern Hemisphere countries (defined as
“Others”). We define the respective indicator variables: i) Namerica for firms that are located in North
America; ii) Europe for firms located in Europe; and iii) Asia for firms located in Asia. The omitted
category is firms located in the Southern Hemisphere. We test two hypotheses simultaneously:
whether risk premia are positive and statistically significant, and whether they differ from each other.
We report the results in Table VIII, Panel A for the level of emissions, and Panel B for the
growth in emissions. For brevity, we focus on scope 1 and scope 3 emissions. We find that the
carbon premium is generally larger in North America, Europe, and Asia than in the residual Southern
Hemisphere group of countries. However, the only statistically significant result, at the 10% level, is
for firms located in North America. Importantly, all premia, especially those that absorb industry-
fixed effects, are positive and statistically significant. When it comes to the growth in emissions, the
magnitudes of the effects for Europe are visibly smaller than those in North America and Asia. Still,
they are all positive and statistically significant. The regions of the world that stand out are Africa,
Australia, and South America, where the coefficient of S1CHG is borderline significant in the baseline
model and insignificant when we add industry fixed effects. This result is quite interesting as these
countries are least aligned with the principle of carbon neutrality.
INSERT TABLE VIII ABOUT HERE
An important robustness question is what matters more? Where the company is headquartered
(which is the determinant of classification in our data), or where emissions are generated? This
distinction may be particularly relevant for firms with global operations, which are subject to different
social pressures, policies, or headline risk. While the granularity of our data does not allow us to
attribute total firm emissions to individual plants, we can evaluate whether the impact of firm
emissions differs in a sample of multinational companies vs. those operated in a single country.
Empirically, we define an indicator variable, FORDUM, equal to one for firms that have at least some
sales generated abroad and zero for firms whose sales are entirely from a single country. Next, we
estimate the models in equations (1) and (2) with an additional interaction term between measures of
emissions and FORDUM.
We present the results in Table A.8. Across all empirical specifications, we find only weak
evidence that firms with multinational operations exhibit different sensitivities of their stock returns
with respect to total firm emissions. For the specifications with the level of emissions, the interaction
terms are small and statistically insignificant and for the specifications with the growth in emissions,
the interaction term is significant at the 10% level for scope 3 emissions. Overall, it does not seem
29

that the geographic source of firm-level emissions is a primary driver of the carbon premium in our
data.
In sum, our continent-level results reveal that carbon transition risk is economically relevant
in most geographic regions and that there is some geographic variation in the carbon premium
throughout the world, even though it is mostly related to short-term measures of carbon-transition
risk. In the final part of this section, we turn to an investigation of whether carbon-transition risk is
tied to a country’s economic development, one of the main issues that frames discussions of
international climate mitigation agreements.
A.7. Economic Development

The level of a country’s economic development is an important consideration when it comes
to climate policy. Typically, richer countries are expected to, and have for the most part, made stronger
commitments to combat climate change. Rich countries have a greater responsibility to combat
climate change as they are the source of the largest cumulative emissions over the past two centuries
by far. Another reason to expect a lower carbon premium in developing countries is simply that
currently these countries have low levels of emissions. In addition, these countries’ economies are
not as deeply founded on fossil fuel energy consumption and may therefore be able to transition more
easily to a renewable energy development path. On the other hand, if these countries depend a lot on
fossil fuels their willingness to adjust in the short run may be smaller.
In this section, we explore the empirical relevance of these arguments. A remarkable general
finding, as we show in Table A.9, is that the carbon premium does not seem to be related to countries’
overall level of development. We first broadly categorize developed countries to be the G20 countries
and the remaining group of countries to be developing countries.15 When we add industry fixed
effects, we observe from Table A.9 (Panel A) that the G20 group of countries have highly significant
carbon premia related to the level of emissions for all three scope categories. But this is also the case
for the most part for the group of developing countries (scope 2 emissions are only significant at the
10% level for this group of countries). Moreover, the size of the coefficients is similar. As for the
short-run effects of carbon emissions on stock returns, we observe that they are again highly
significant for both the G20 countries (controlling for industry) and the group of developing countries.
Also, the size of the coefficients is again broadly similar.
15 The results are qualitatively very similar, reported in Panel B, if we define developed countries based on OECD
membership.
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Admittedly, the above classification of countries into two groups, developing and developed
is rather coarse, and there is substantial heterogeneity in country characteristics within each group.
Accordingly, we also investigate the effect of interacting GDP per capita, and other development
variables such as the share of the manufacturing sector in GDP and health expenditure per capita,
with the level and changes in emissions. As we show in Panel A of Table IX, the interaction of per
capita GDP and the level of emissions is insignificant. The same is true for the interaction of the
share of manufacturing and the level of emissions, and for the interaction of per capita health
expenditures and the level of emissions. Overall, these results indicate that differences in development
do not appear to explain much of the variation in long-run carbon premia across countries. On the
other hand, when we interact the same variables with the percentage change in emission, as a measure
of short-term risk, a slightly different picture emerges. Now, firms located in countries with higher
GDP per capita and a more developed health system have statistically smaller stock returns. Further,
firms located in countries with a higher dependence on the manufacturing sector in their output
creation have higher stock returns. These results are consistent with the view that firms in developed
countries face lower challenges in conforming with their country’s carbon neutrality objective. The
growth in emissions variable tells us about how sustainable a country’s development path is. If, for
example, the growth in emissions in a developing country is large because of high reliance on coal
then, in effect, the companies in that developing country are exposed to greater future transition risk
when pressure will grow to phase out coal.
INSERT TABLE IX ABOUT HERE
Altogether, both regional and economic variation in carbon transition risk likely nest several
specific factors that contribute to the observed results. Investigating the origins of these factors is the
subject of our next section.
B. Carbon-Transition Risk Drivers

Even though the notion of carbon-transition risk has been commonly referred to in policy
discussions surprisingly little is known about the different sources of this risk. Part of the reason is
that most of the studies on carbon-transition risk are either highly aggregated or focus on a single
country or industry (e.g., Bolton and Kacperczyk, 2021a; Hsu et al., 2020). Also, many commentators
often reduce carbon-transition risk purely to policy uncertainty, whereas other dimensions (for
example technological innovation or the prevailing belief system) are clearly relevant.
We explore several channels through which carbon-transition risk could manifest itself:
technological, socio-economic, regulatory policy, and reputation risk, which affect future cash flows,
and changing investor attention to climate change as a source of variation for the discount-rate
31

channel. The main empirical challenge in identifying each of the channels empirically is that to a large
extent we can only measure transition risk drivers at the country level. As is well known, regression
specifications that relate stock returns to country-level characteristics, could yield biased estimates due
to omitted country-level variables. To mitigate this concern, we rely on firm-level variation in carbon
emissions and estimate the role of the different mechanisms by interacting the country variables with
firm-level emissions. This approach follows closely the identification strategy of Rajan and Zignales
(1998), which also interacts country-level financial development variables with industry-level financial
constraints. In our tests, we are also able to sharpen our empirical identification by absorbing
additional firm-level, industry-level, and country-level variation through a mix of observable
characteristics and fixed effects.
B.1. Technological Mix

An important source of carbon-transition risk is technological change in energy production
and carbon capture. As they transition to carbon neutrality, firms may find themselves at different
points in their energy mix, carbon intensity, and outside demand for energy. The more distant the
firms are from their target technology profile in a new green equilibrium, the more they are exposed
to potential aggregate technology shocks. The resulting risk may come from unexpectedly high costs
of green energy production as well as uncertainty about such costs.16
In this section, we explore the importance of these factors for the pricing of carbon-transition
risk. We classify technology factors into two categories: the first two relate to the production side of
carbon emissions; the third relates to the consumption side. First, we investigate whether firms located
in countries with a higher share of renewable energy have lower carbon premia. Second, we explore
whether the size of the fossil fuel production sector affects the carbon premium. We hypothesize that
firms located in countries in which the share of the energy sector is large would have a larger carbon
premium. Third, consumption of energy per capita may indicate how far the transition to a low-
emission economy has progressed. It may also indicate the expected demand for fossil-fuel energy
going forward. We expect that firms in countries with high energy consumption are exposed to higher
transition risk.
The results of this analysis are reported in Table X. We uncover a few interesting patterns.
First, we find that green and brown energy variables do not matter much for how stock returns react
16 A separate issue that we do not explore formally in the paper is the uncertainty about the depreciation of any stranded
assets and their impact on firm value. Atanasova and Schwartz (2020) analyze the empirical importance of this issue in the
oil & gas industry.
32

to emission levels. Across all specifications, the coefficients of the interaction terms are small and
statistically insignificant. The exception is the interaction term between scope 3 emissions and the
reliance on renewable energy. This effect, however, is only marginally significant. Second, the
hypothesis that a more renewable-energy based economy is associated with lower carbon premia is
broadly borne out in the data when it comes to firm-level growth in emissions. Firms located in
countries with a larger fraction of renewable energy production have lower carbon premia with respect
to their year-to-year emissions growth, as indicated by the negative highly significant coefficients for
the interaction terms. Similarly, we find that the coefficients of the interaction terms between the
share of the energy sector and the growth in emissions are highly significant and positive, indicating
that investors perceive the risk with respect to carbon emissions to be greater in countries with large
fossil fuel energy sectors. Interestingly, the countries with higher reliance on renewables and lower
reliance on the fossil fuels are typically developed countries, which could partly explain why we found
that short-term transition risk is priced more for developing countries. At the same time, we find that
energy use is not significantly related to stock returns irrespective of the risk measure we focus on.
One reason may be that the energy source being consumed may be green. Also, the place of consumed
energy need not be the same as the country in which it is sourced. In sum, the distinction between
short-term and long-term reactions to technological mix suggests that this variable is transitory in
nature, at least when assessed from the capital markets perspective. The energy mix cannot inform the
long-term costs of the transition, as any potential product or process innovation in this market is likely
to modify future expectations.
INSERT TABLE X ABOUT HERE
Overall, we find strong evidence that a country’s energy production mix is an important
predictor of how investors price risk with respect to short-term changes in emissions, but not with
respect to the level of emissions. The gist of these results is broadly consistent with our hypothesis
that uncertainty about technological change increases transition risk. Our decomposition further
reveals that production side factors are more relevant for investors than energy consumption factors.
B.2. Socio-political Environment

Uncertainty about future carbon emission policies depends on the institutional and socio-
political environment that shapes government action. We should expect lower policy uncertainty in
politically stable and socially harmonious societies, and in countries with more democratic institutions
that tend to reduce the risk of arbitrary policy swings. In contrast, less equal societies are more likely
to waver in their policy commitments and make less predictable progress towards carbon neutrality.
This greater climate policy uncertainty, in turn, is likely to be reflected in a higher carbon premium.
33

We explore this channel by looking at whether a country’s “rule of law” and “voice” affects the carbon
premium of its companies. Rule of law captures perceptions of the extent to which agents have
confidence in and abide by the rules of society, and in particular the quality of contract enforcement,
property rights, the police, and the courts, as well as the likelihood of crime and violence. The measure
RULELAW, is standardized between -2.5 and 2.5. Voice reflects perceptions of the extent to which
a country's citizens are able to participate in selecting their government, as well as freedom of
expression, freedom of association, and a free media. The standardized value, defined as VOICE, lies
between 2.5 and -2.5. The 2.5 number indicates the situation where there is no obstacle to
expressing voice and -2.5 number reflects situations where people have no way of expressing
their voices. Another indirect measure of social and political stability we look at is the country’s
income inequality as measured by the Gini coefficient. All three country measures are obtained at
annual frequency from the World bank. As before, we interact each of these variables with the level
and growth of emissions to distinguish between long-term and short-term effects. We report the
results in Table XI.
INSERT TABLE XI ABOUT HERE
We do not find a significant effect of any of these variables on the premium associated with
the level of emissions and conclude from these results that social factors do not appear to affect the
long-run risk associated with carbon emissions. All coefficients of the interaction terms in Panel A are
small and statistically insignificant. In contrast, we find that socio-political factors do matter for
investors’ carbon-transition risk perceptions in the short run. As reported in Panel B, the coefficients
of the interaction terms between respectively “rule of law” and changes in emissions, and between
“voice” and changes in emissions, are both highly significant and negative, indicating that the carbon
premium is lower in countries with better rule of law and more democratic political institutions.
Similarly, the coefficient of the interaction term between the Gini coefficient and changes in emissions
is significant and positive, meaning that in countries with higher inequality the carbon premium is
likely to be larger. Overall, these results on the effect of socio-political factors are consistent with the
view that greater social harmony produces less climate policy uncertainty. But these effects manifest
themselves in the short run, presumably because the socio-economic environment can evolve so that
current conditions are seen as having a transitory impact on policy uncertainty by investors. For
example, the political environment and social norms can change in the medium and long term; hence,
any constraints imposed in the short run may no longer bind in the longer run. From a different angle,
one can link our prior findings on the heterogeneity in short-term risk premia between developed and
developing countries to the different states of socio-economic capital across countries.
34

B.3. Climate Policy Tightness
Transition risk is often associated with expected regulatory changes dictating the adjustment
to a green economy. Investor expectations of future climate-related policies can be an important risk
component. Firms located in countries in which the government has made the most ambitious pledges
to reduce carbon emissions may therefore be associated with a higher carbon premium. This is
particularly true when local regulations are reinforced by pan-governmental policy actions, such as the
UN-led COP initiative.
Climate change mitigation policies may originate from two sources: domestic regulators or
international pan-governmental agreements. In this section, we evaluate the importance of each of
the channels separately using unique data on country-specific regulatory tightness. Our policy data
come from Germanwatch. To our knowledge, ours is the first large-sample study that evaluates the
direct importance of both types of policies for global stock returns. Each year, Germanwatch collects
information on all climate-related policies and converts this information into a numerical score, where
a higher number means a stricter regulatory regime. We define two variables that we interact with
firm-level carbon emissions. INTPOLICY is a normalized measure of international policy tightness;
DOMPOLICY is a normalized measure of domestic policy tightness.17 We interact each of the two
variables with the level and growth in firm emissions.
We report the results in Table XII. Two interesting findings emerge. First, in Panel A, we
show that the effects of climate policy operate on the carbon premium associated with carbon
emission levels. The effect is positive and economically significant for both scope 1 and scope 3
emissions, and statistically significant for scope 3 emissions. On the other hand, neither type of
climate policy tightness affects the carbon premium associated with the year-by-year growth in
emissions, as shown in Panel B. These results support the view that carbon policies are seen by
investors as permanent shocks to carbon-transition risk. That is, investors’ perspective appears to be
that climate policies that are already in place are largely irreversible. Second, and perhaps more
unexpectedly, we find that between the two types of climate policies, domestic ones have a bigger
effect on the carbon premium. This result sheds light on many analysts’ concerns that the
commitments made by countries in Paris or Glasgow could be empty promises; that commitments
made through international agreements lack credibility unless they are translated into domestic policy.
It is only when these commitments are followed up by domestic policy implementation that investors
start paying attention.
17 Further details on the methodology behind the policy measures can be obtained from the Germanwatch website, at
https://www.germanwatch.org/en/21110.
35

INSERT TABLE XII ABOUT HERE
B.4. “Brown” Reputation Risk

An important component of transition risk is reputation risk. A few fossil-fuel intensive
industries that we define as ‘salient’ are known to attract negative media coverage, which could further
amplify transition risk. Hence, the question whether the carbon premium is mostly concentrated in
the oil & gas, utilities, and motor sectors that are the focus of much negative press. Could it be that
the reason behind much cross-sector variation in the carbon premium lies in the negative reputation
earned by “brown” sectors? Given that the media focus is largely on the salient brown industries, one
would expect that investors in companies in these sectors price-in an additional risk compensation for
their exposure to the negative stigma of holding these stocks.
To explore this hypothesis, we estimate a modified regression specification from that in Table
VI, conditional on whether a company belongs to one of the salient industries mentioned above, or
not. We define an indicator variable, SALIENT, equal to one if the company belongs to one of the
salient industries, and zero otherwise. Our coefficients of interest are those of the interaction effect
between SALIENT and respective emission measures. If these salient brown industries are indeed
more stigmatized one would expect the carbon premium to be smaller in the other sectors. In terms
of our conditional regression specification, this would mean that the coefficient of the interaction term
is positive and statistically significant.
We report the results in Table XIII. By and large, we find that the premium associated with
the level of emissions is not statistically different for salient vs. non-salient industries, and if anything,
the direction of the effect goes against the hypotheses of a premium being present mostly in salient
industries. The results are slightly different for the premium associated with the growth in emissions.
Here, we find a slightly stronger effect for changes in scope 3 emissions on returns for companies that
operate in salient industries.
INSERT TABLE XIII ABOUT HERE
This finding could also mean that stigma has mostly already been “baked in” in these brown
sectors, but stigma is yet to materialize in the other sectors that have faced less analyst scrutiny. These
findings are also consistent with the results in Table VI that variations in stock returns associated with
carbon emissions across industries swamp within-industry variations. Another possibility is that stigma
could extend to an entire country when the country is disproportionately dependent on brown sectors,
as is the case for many countries in the “Others” category. By this interpretation, the weaker results
we found for this category could be due to this baked in stigma associated with an over-dependence
36

on brown sectors. Note, however, that our regressions include country fixed effects, which to some
extent absorb any such country-level effect.
B.5. Physical Risk

Much of the economics literature on climate risk has sought to estimate the expected physical
damages due to climate change. A natural hypothesis is that transition risk is positively correlated with
physical risk. As countries are exposed to more severe weather events caused by climate change one
would expect that there will be greater support for policies combatting climate change in these
countries. In other words, the extent to which a country has been exposed to climate disasters may
shape investors’ beliefs about the cost of long-term damage due to climate change. To test this
hypothesis, we use a country-level, year-by-year index measuring physical risk (CRI) from Germanwatch.
This index is based on the frequency of climate-related damages. Countries with higher values of the
CRI index are considered as having higher physical risk. We estimate the coefficients of the interaction
terms between CRI and firm-level emission measures, both their levels and growth rates. The results
are reported in Table A.10. Columns 1-4 show the results based on total emissions, and columns 5-8
the results based on growth rates. Consistent with the hypothesis that physical risk amplifies the
carbon premium associated with transition risk we find positive values for the interaction terms with
emission changes. However, all these coefficients are statistically insignificant. Also, contrary to our
prediction, the coefficients of the interaction terms with emission levels are negative (again, however,
these coefficients are statistically and economically small). Hence, greater physical risk exposure for a
country because of climate change, and greater incidence of physical climate shocks, does not result
in greater carbon transition risk.
Overall, we conclude that transition risk does not appear to be significantly linked to different
exposures to physical risk, perhaps because physical risk is a localized risk, and is unlikely to affect all
regions with the same intensity, whereas the carbon transition is a global issue, which is largely
independent of whether physical risks materialize in a specific country or not. It is simply a reflection
of the shift away from fossil fuels. Indeed, countries like Australia, Brazil and Russia, or U.S. states
like Texas, Florida, or West Virginia, that have experienced massive climate disasters, have not seen a
political movement emerge to shut down coal mines and other fossil-fuel dependent economic
activity. Somehow the political process in these countries (and U.S. states) does not seem to comingle
physical and transition risk.
B.6. Changes in Investor Awareness
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Our analysis so far has explored the carbon premium through the cash-flow uncertainty
channel. Another force that could affect the carbon premium is the discount-rate channel related to
changing investor perceptions about climate change and carbon transition risk. Bolton and
Kacperczyk (2021a) find evidence of a discount-rate channel, with investor perceptions of carbon
transition risk changing over time, but their evidence is purely based on U.S. companies, which
naturally raises the question of external validity. More importantly, this evidence has little to say about
what aspects of transition risk are altered by the changed beliefs. Although our analysis here includes
77 countries, we cannot clearly isolate the effects of this channel given that we are pooling all
observations from 2005 to 2018 together. However, we can explore how the carbon premium reacts
to salient events that could reshape public perceptions of climate change. One such defining event is
the landmark Paris climate agreement at the COP 21 in December 2015. This event has enhanced the
salience of the climate debate worldwide and raised the importance of possible transition risk going
forward. It is therefore to be expected that the event has likely changed investors’ perception of risk
along multiple dimensions, including future energy costs, social preferences, or policy changes. Our
empirical analysis around this event captures the aggregate effect, encompassing all the above
possibilities, of investors’ responses to this event.
Specifically, we define an indicator variable Paris that is equal to zero for the two years (2014-
2015) preceding the Paris agreement and equal to one for the two years (2016-2017) following the
agreement. Next, we regress stock returns on carbon emissions interacted with Paris. We report the
results in Table XIV, which provides the estimates for the differences in levels and changes in
emissions for our aggregate sample of 77 countries. Notably, there is no significant premium
associated with the level of scope 1 emissions right before Paris (even with industry fixed effects),
whereas there is a significantly larger positive premium after Paris. We also find a significant increase
in the premium for the level of scope 3 emissions. In turn, the results for changes in emissions are
significant in the pre-Paris period and show no significant difference with the post-Paris period. One
way to interpret these contrasting results is that because of COP 21, investors significantly updated
their beliefs about long-term transition risk. Consistent with our previous findings, these results also
suggest that the Paris agreement has been particularly important in reshaping investor beliefs about
forthcoming climate-related policies. Indeed, this has been a popular narrative among practitioners
and policy makers.
INSERT TABLE XIV ABOUT HERE
In which parts of the world did the Paris agreement have the biggest effect? To explore this
question, we estimate the same model as in Table XIV for each continent. We report the results for
the level of carbon emissions in Table XV. Remarkably, there is no apparent change for North
38

America. Both before and after the Paris agreement there is no significant carbon premium associated
with the level of emissions. In Europe, both before and after Paris there is a significant carbon
premium (except that the premium for scope 1 emissions becomes insignificant after Paris). As a
result, there is no significant change in the value of the premium around the Paris event for Europe.
The biggest and statistically significant change is in Asia, where the carbon premium was insignificant
before Paris, but became highly significant after Paris. This is true, whether we exclude China or not.
Finally, in the other continents (Africa, Australia, and South America) there is also a significant positive
change before and after Paris, even though this change is based on a smaller sample size.
INSERT TABLE XV ABOUT HERE

Another relevant breakdown is between the group of G20 countries and the group of other
countries. The results are reported in Table A.11. Again, the difference in the carbon premium before
and after Paris is dramatic for the group of G20 countries. Before the agreement there was no
significant carbon premium, but after the agreement there is a highly significant positive premium,
whether we include industry fixed effects or not. In contrast, the changes in the other group of
countries are much smaller. While there is a shift towards a significant premium, it is mostly for scope
3 emissions.
We also undertake this analysis after excluding the salient industries associated with fossil fuels.
Recall that our cross-sectional analysis when we pool all years together established that the carbon
premium is present even beyond these industries. The results reported in Table A.12 reveal similar
robustness in carbon premium around the Paris shock. Indeed, there is a highly significant and
positive premium associated with the level of emissions in other industries as well post Paris.18
All in all, these results paint a rather striking picture of the pricing of transition risk across
countries. The expectation of a significant long-term change in carbon premium seems to be reflected
in salient events, such as the Paris agreement. The striking and surprising finding here is that awareness
about carbon risk, as reflected in the carbon premium, has changed the most in Asia, where investor
awareness has jumped after the Paris agreements, whereas it has remained basically unchanged in
Europe and North America, either because these regions already had greater awareness of climate
change (Europe), or because they had less awareness and did not revise their beliefs (North America).
To further explore this conjecture, we look at the predictability of national reforms (measured by
18 We have also tested whether the changing awareness results are driven by the sample of new companies that Trucost
has added to its database. The results, in Table A.13, show similar effects for the “legacy sample”, so that it is unlikely that
the addition of the new companies is driving the results.
39

DOMPOLICY) from the previous year’s international policy framework (measured by INTPOLICY),
before and after Paris, for the three different regions: Asia, Europe, and North America. In the
regression model we also include country-fixed effects. Consistent with our narrative, we find that
there is predictive power of national policies in past international commitments following the Paris
agreement. It is the highest for Asia, much lower for Europe, and it is the opposite for North America,
the last result being consistent with the fact that the U.S. administration around Paris has mostly
moved in the opposite direction to the international framework. We report these results in Table A.14.
One potential concern with the risk premium interpretation is that we have measured changes
in the risk premium over relatively short periods, even if a period of a decade and a half is not that
short. Could it be that our findings are just a random draw? Although it is not possible to test this
luck hypothesis, one should bear in mind that the Paris agreement is a particularly salient event and
its important consequences have been established in other contexts. Also, the last decade has
witnessed a significant increase in climate-related events, and a sharp increase in media coverage of
these events, so that our interpretation based on changing risk (perceptions) has a solid grounding in
these trends.19
C. Transitioning to a Green Equilibrium

Our results are broadly consistent with the existence of a return premium compensating
investors for the carbon-transition risk they face. But at what point did investors begin to demand
compensation for this risk? Basic logic suggests that the period when carbon transition risk is
compensated should be preceded by a period during which assets are repriced to reflect the new risk.
This repricing can in principle be a protracted process that parallels the economic shift from a brown
to a green equilibrium. Moreover, the repricing is driven by changes in investor awareness about
climate change risk. During this transition phase, one would expect to see increased demand (and
therefore higher prices) for assets with low levels of emissions, and decreased demand (and lower
prices) for assets with high levels of emissions. Although this adjustment mechanism is
straightforward, testing for such asset price adjustments is challenging, especially in the context of
heterogenous global financial markets, in which individual assets may transition at different times and
at different speeds.
In the absence of a clear large-scale empirical setting, we fall back on suggestive evidence from
one individual sector, the tobacco industry, where such a repricing process accompanied the
19 In untabulated tests we have also tested the change in the risk premium by using the long period of 2005-2015 as the
pre-period. The results for the interactions terms are qualitatively similar.
40

rebranding of tobacco companies as “sin stocks”. As Hong and Kacperczyk (2009) show, the
reclassification of the tobacco industry as a sin asset class meant that tobacco companies were added
to the divestment lists of many investors. This divestment movement resulted in higher expected
returns (Merton, 1987). Prior to 1950s the negative health effects of tobacco consumption were not
known; in fact, many considered tobacco a cure. This perception changed following the reports of the
General Surgeon, which resulted in a massive change in beliefs about the industry. Consequently, the
1950-1970 period saw a massive revaluation of the industry, with tobacco companies being valued at
much lower multiples. Following this repricing, however, tobacco companies over the subsequent
four decades delivered very large returns.
We believe that a similar process is underway in the energy industry, with green energy
companies being valued at much higher multiples and some “brown” companies already being valued
with lower multiples. We can infer some of these repricing effects from some of our tests. As
highlighted in Table XIII, when we exclude salient industries from our sample the effect of scope 1
emission levels on stock returns increases relative to the unconditional value in Table 6, which means
that the salient industries, on average, underperformed other sectors (with lower emissions) over our
sample period. Interestingly however, this difference only appears in regressions without industry
fixed effects, which suggests that the repricing has been a broad categorical repricing of the whole
industry rather than individual firms in these industries. Of course, this repricing need not be a once-
and-for-all revaluation as it appears to have been for the tobacco industry. In fact, it seems to us that
investors’ attitudes to carbon emissions are much more dynamic, and thus it is quite possible that one
could witness multiple waves of repricing followed by periods with high returns. This is in fact what
we think our data captures. Because the carbon transition process is ongoing this can only be a
speculative inference, which we expect future out-of-sample tests of the carbon transition will confirm.
IV. Conclusion
If global warming is to be checked, the global economy will have to wean itself off fossil fuels
and reduce carbon emissions to zero by 2050 or 2060 at the latest. This translates into a year-to-year
rate in emissions reductions equal to the drop we have witnessed in 2020 as a result of the COVID-
19 pandemic. Whether the global economy will be able to stick to such a rate of reduction in the use
of fossil fuels, whether the reduction in emissions will be smooth or highly non-linear and abrupt, is
impossible to say. But what is certain is that in the coming years and decades investors will be exposed
to substantial transition risk. Given that stock markets are fundamentally forward looking it is natural
to ask whether and to what extent this transition risk is reflected in stock returns.
41

We have taken the broadest possible look at this question by analyzing the pricing of carbon-
transition risk at the firm level in a cross-section of over 14,400 listed companies in 77 countries. To
date very little is known about how carbon emissions affect stock returns around the world. Our
wide-ranging exploratory study provides a first insight into this question. We have found evidence of
a widespread, significant, rising, carbon premium—higher stock returns for companies with higher
carbon emissions. This premium is not just present in a few countries (US, EU) or in a few sectors
tied to fossil fuels. It is ubiquitous, affecting firms in all sectors over three continents, Asia, Europe,
and North America. Moreover, stock returns are related not just to firms’ direct emissions but also
to their indirect emissions through the supply chain. And the carbon premium is associated both with
the year-to-year growth in emissions (a short-run carbon transition risk exposure) and the level of
emissions (a long-run exposure).
Finally, we find that carbon transition risk is not just a reflection of climate policy uncertainty
but is also tied to uncertainty with respect to technological progress in renewable energy and the socio-
political environment that could support or undermine climate policies. In turn, time-series patterns
point to a time-varying carbon premium, with the premium rising significantly following the COP21
meeting.
At a broad level, our study is relevant for the discussions centred on carbon taxation as a
means to achieve reductions in emissions. While the idea of a carbon tax is appealing based on
economic first principles, it clearly faces practical obstacles. A major impediment to the introduction
of a global carbon tax is coordination among political parties with diverse interests and financial
capacities. Our study suggests that financial markets could play an important amplifying role. The
increasing cost of equity for companies with higher emissions can be seen as a form of taxation
through capital markets.
Our study is obviously not free of empirical challenges. One particular concern is that the
shifting beliefs over climate change during our sample period are unusual and unlikely to be
representative of the climate shocks that will unfold in the foreseeable future. It could be that investors
have overreacted to the Paris agreement and all the attention devoted to climate change issues over
our sample period. If that were the case, we would not really be picking up a persistent expected return
difference. Rather, we would be finding return premia driven by non-persistent “shocks” to investor
beliefs. This is a possibility that we cannot rule out. But given the climate science this seems highly
unlikely. If anything, evidence of an overheating planet is building day by day and alarm about climate
change is rising. Given that carbon emissions continue to rise, the net zero commitments will be
harder to achieve, which means that carbon transition risk is rising. It is therefore far more likely that
42

investor concerns about carbon transition risk will grow. This of course means that we are potentially
underestimating the size of the carbon premium.
43

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45

Figure 1. Global Emissions and Projected Average Annual Global Temperature
Figure 2. Decarbonization Pathways Conditional on Period-Specific Emissions
46

2005-2011
2012-2018
Figure 3. Total Annual Carbon Emissions by Country
2005-2011
2012-2018
Figure 4. Average Annual Total Carbon Emissions per Firm
47

Table I
Carbon Emissions by Country: 2005-2018
S1TOT (S2TOT; S3TOT) measures the firm-level average (by country) of scope 1(scope 2; scope 3) carbon emissions measured in tons of CO2e. S1CHG (S2CHG; S3CHG) measures the percentage growth rate in carbon
emissions of scope 1 (scope 2; scope 3) (winsorized at 2.5%). TOTS1 (TOTS2; TOTS3) is a sum of S1TOT (S2TOT; S3TOT) within a country in a given year (averaged across all years).
CODE COUNTRY Freq. Perc. # co. S1TOT S2TOT S3TOT S1CHG S2CHG S3CHG TOTS1 TOTS2 TOTS3
AE UAE 1,748 0.2 34 382822 45424 133220 10.93% 16.32% 11.05% 13000000 1106904 3338979
AR ARGENTINA 550 0.06 6 1977235 259067 1032782 11.18% 38.18% 10.24% 9816885 1137898 4831946
AT AUSTRIA 3,741 0.42 42 1543117 175280 1478427 10.00% 16.37% 7.56% 34500000 4073719 33900000
AU AUSTRALIA 37,405 4.21 471 580313 225151 390624 14.38% 20.19% 11.88% 141000000 51700000 91500000
BD BANGLADESH 254 0.03 5 112458 23661 145789 16.66% 25.97% 14.83% 490572 106452 624504
BE BELGIUM 3,883 0.44 52 1611505 398625 1586838 5.88% 11.12% 6.28% 35200000 9368517 39000000
BG BULGARIA 123 0.01 3 49815 11011 44659 34.85% 6.04% 14.60% 1010125 85163 303958
BH BAHRAIN 198 0.02 3 1986 5858 28640 7.04% 8.84% 9.21% 5696 16924 83299
BR BRAZIL 10,249 1.15 126 1846871 200604 2147921 11.05% 16.74% 9.09% 119000000 12700000 145000000
BW BOTSWANA 68 0.01 2 3986 16534 38093 12.15% 21.45% 21.82% 6650 28041 64964
CA CANADA 25,479 2.87 399 1179827 194523 794471 13.80% 18.99% 11.30% 226000000 35700000 147000000
CH SWITZERLAND 12,638 1.42 172 1751558 219020 1848782 5.40% 9.95% 5.63% 142000000 18500000 144000000
CI CÔTE D’IVOIRE 154 0.02 2 10867 13642 102418 5.46% 6.50% 6.45% 18779 25697 181503
CL CHILE 3,991 0.45 37 2520658 150335 526513 9.99% 17.85% 9.09% 61800000 3816032 13500000
CN CHINA 73,490 8.28 1660 4009318 258028 1121424 17.16% 24.86% 16.47% 2910000000 232000000 841000000
CO COLOMBIA 1,141 0.13 13 2638497 153165 1602004 16.65% 23.03% 13.89% 24900000 1460375 14600000
CZ CZECH REP. 446 0.05 5 80966 84133 106096 3.29% 8.69% -2.05% 298304 276486 311847
DE GERMANY 19,023 2.14 253 4126920 584281 3403940 7.12% 13.69% 7.24% 458000000 70800000 397000000
DK DENMARK 4,310 0.49 48 1830641 81427 715844 6.29% 8.37% 5.98% 48000000 2101215 19200000
EE ESTONIA 116 0.01 2 1324801 23427 72707 10.45% 18.91% 5.49% 2649601 46855 145415
EG EGYPT 2,855 0.32 30 1300763 71534 347754 4.98% 10.42% 5.58% 22200000 1285661 6255982
ES SPAIN 7,140 0.8 84 3733641 254727 2095625 9.14% 15.39% 6.55% 153000000 11100000 89400000
FI FINLAND 4,049 0.46 42 1401658 320239 1548562 2.96% 10.18% 3.74% 34300000 7964368 37800000
FR FRANCE 20,256 2.28 248 3537015 457697 2902571 7.12% 11.09% 6.26% 411000000 57400000 355000000
GB UK 68,153 7.68 660 1037499 263688 1350755 7.47% 8.86% 6.25% 436000000 110000000 560000000
GH GHANA 235 0.03 2 3583 3103 68338 0.63% 3.23% 2.96% 6882 5945 133928
GR GREECE 1,929 0.22 23 4208318 155010 938891 13.98% 18.93% 7.11% 47800000 2284545 11200000
HK HONG KONG 28,827 3.25 830 1963473 177584 524083 14.95% 28.14% 14.69% 383000000 45200000 119000000
HR CROATIA 128 0.01 2 839807 101136 745120 -6.99% -1.29% 12.21% 1503091 194606 1321002
HU HUNGARY 474 0.05 3 2033690 348850 2292191 8.91% 22.72% 0.16% 6100691 1046018 6871986
ID INDONESIA 8,865 1 130 982778 88318 416476 12.58% 14.81% 10.12% 62100000 5377655 28000000
IE IRELAND 1,749 0.2 20 1013523 88576 854927 5.99% 9.48% 5.64% 12700000 1108046 10300000
IL ISRAEL 5,688 0.64 92 207414 49185 289135 12.32% 15.74% 9.46% 9144490 1943727 10900000
IN INDIA 33,514 3.78 518 3452714 141930 1006817 13.04% 19.06% 12.24% 831000000 34700000 248000000
IS ICELAND 81 0.01 3 1257 1412 26849 32.91% 28.11% 28.32% 3156 3806 67937
IT ITALY 6,656 0.75 107 4129000 307340 2549945 6.26% 11.40% 5.64% 169000000 14300000 118000000
JM JAMAICA 68 0.01 2 335 1422 11711 1.05% 16.31% 12.74% 671 2843 23423
JO JORDAN 196 0.02 4 1325 6190 30871 -7.52% 0.47% 6.09% 4338 17295 102857
JP JAPAN 124,903 14.07 2258 1312299 231427 1511355 4.90% 10.72% 5.22% 980000000 204000000 1250000000
KE KENYA 524 0.06 8 103831 8819 75464 24.97% 27.08% 14.38% 799872 58883 458581
KW KOREA 51,738 5.83 843 1243235 166251 1001098 10.34% 14.19% 9.15% 397000000 60700000 344000000
KZ KAZAKHSTAN 45 0.01 1 1153 1005 21863 19.74% 18.64% 13.32% 1153 1005 21863
LB LEBANON 85 0.01 2 3788 11484 34112 10.68% 13.73% 19.42% 5696 17485 54787
LK SRI LANKA 452 0.05 4 11715 29408 42644 10.17% 23.04% 6.94% 28522 89216 136662
LT LITHUANIA 58 0.01 1 1590 4595 18366 23.73% 20.36% 21.61% 1590 4595 18366
48

LU LUXEMBOURG 54 0.01 3 1035 1368 8149 -33.03% -36.01% -24.82% 2263 2823 17197
MA MOROCCO 1,352 0.15 13 1690454 67664 307399 6.16% 8.18% 5.86% 15400000 582425 2563349
MU MAURITIUS 114 0.01 3 925 1368 9340 45.24% 67.68% 27.90% 2115 3259 22106
MX MEXICO 4,157 0.47 65 630508 322220 1146013 10.20% 15.58% 9.50% 23000000 10100000 36900000
MY MALAYSIA 12,596 1.42 188 1289048 58716 364614 12.85% 18.36% 9.32% 108000000 6093201 32100000
NG NIGERIA 1,182 0.13 16 1556752 68555 299827 1.31% 5.69% 0.65% 23600000 1024925 4236235
NL NETHERLANDS 5,579 0.63 63 5563867 702550 2898875 5.06% 7.38% 4.50% 188000000 23700000 97700000
NO NORWAY 5,680 0.64 97 1269294 294583 1627966 10.02% 13.26% 9.33% 49000000 9238739 56700000
NZ NEW ZEALAND 3,011 0.34 50 393267 32502 239998 5.67% 9.68% 8.79% 8036961 707115 5067580
OM OMAN 488 0.05 8 369577 60682 106543 6.60% 16.64% 8.10% 2686115 433197 755255
PE PERU 544 0.06 5 1023906 213257 201341 15.87% 18.77% 10.71% 3617539 755370 721199
PH PHILIPPINES 5,583 0.63 72 1077980 87818 518201 17.10% 26.63% 12.56% 49100000 4010504 23100000
PK PAKISTAN 3,169 0.36 51 750597 40021 217645 12.02% 14.41% 9.61% 25900000 1223456 6959005
PL POLAND 5,672 0.64 60 2368805 158750 619717 12.22% 18.37% 10.16% 94300000 6032271 22200000
PT PORTUGAL 1,351 0.15 17 3179836 233808 1365071 2.71% 12.34% 3.92% 26400000 1974726 11800000
QA QATAR 1,222 0.14 23 611145 45424 210790 7.31% 12.18% 6.43% 10900000 812774 3752829
RO ROMANIA 250 0.03 4 886381 56688 680844 14.92% 9.79% 8.08% 3381664 202319 2430224
RS SERBIA 168 0.02 3 272240 23975 196896 23.17% 18.38% 19.48% 601691 55795 452004
RU RUSSIA 1,925 0.22 26 10100000 816962 6098643 16.11% 19.48% 9.72% 147000000 10800000 72600000
SA SAUDI ARABIA 1,088 0.12 98 2345866 1002530 1190067 -10.47% 8.66% 4.26% 66100000 22600000 43600000
SE SWEDEN 11,560 1.3 174 228060 74868 703569 7.48% 11.15% 7.68% 17000000 6014555 53200000
SG SINGAPORE 9,881 1.11 145 864602 122194 1143235 12.55% 18.94% 10.64% 55800000 8285673 74100000
SI SLOVENIA 220 0.02 3 13270 26995 71210 1.05% 21.79% 5.40% 37469 78045 203048
TH THAILAND 5,767 0.65 106 2089681 167475 674012 14.69% 23.17% 13.21% 88800000 6770391 31000000
TN TUNISIA 140 0.02 2 239 235 5106 -6.55% 0.70% -1.53% 477 469 10212
TR TURKEY 4,706 0.53 58 1697617 130762 768350 15.98% 18.69% 8.58% 55000000 4237040 23400000
TW TAIWAN 41,061 4.63 684 530858 134310 531483 10.24% 17.23% 7.74% 135000000 41300000 147000000
UG UGANDA 88 0.01 1 842 1470 4194 34.73% 71.91% 4.62% 842 1470 4194
US USA 175,377 19.76 3013 2012926 323727 1733058 7.87% 13.84% 8.24% 2330000000 403000000 2100000000
VN VIET NAM 820 0.09 15 479322 43086 343905 12.19% 18.35% 14.68% 6087639 552733 4260247
ZA SOUTH AFRICA 14,883 1.68 148 1074195 444228 423650 10.53% 17.41% 6.08% 95900000 41400000 40100000
ZW ZIMBABWE 56 0.01 2 15480 14546 138070 -6.75% 1.28% 8.77% 48346 45915 457559
Total 887429 100 14468 1874065 246606 1301047 9.73% 15.35% 8.86% 11813099883 1615895170 7990066031
49

Table II
Summary Statistics
This tables reports summary statistics (averages, medians, and standard deviations) for the variables used in regressions. The sample period is 2005-2018.
Panels A and B report the emission variables and their pairwise correlations. Panel C shows the results from the autocorrelation results for the levels and
changes in emissions measured at annual frequency. Columns (1)-(3) include no fixed effects, while columns (4)-(6) include year and firm fixed effects.
Standard errors (in parentheses) are double clustered by firm and year. Panel D reports summary statistics of the control variables. RET is the monthly
stock return; LOGSIZE is the natural logarithm of market capitalization (in $ million); B/M is the book value of equity divided by market value of equity;
ROE is the return on equity; LEVERAGE is the book value of leverage defined as the book value of debt divided by the book value of assets; MOM
is the cumulative stock return over the one-year period; INVEST/A is the CAPEX divided by book value of assets; HHI is the Herfindahl index of the
business segments of a company with weights proportional to revenues; LOGPPE is the natural logarithm of plant, property & equipment (in $ million);
VOLAT is the monthly stock return volatility calculated over the one year period; MSCIi,t is an indicator variable equal to one if a stock i is part of MSCI
World Index in year t, and zero otherwise. SALESGR is the annual percentage change in firm revenues. LTG is the mean consensus forecast of long-
term earnings growth. GDPPC is a country’s GDP per capita. MANUFPERC is the percentage of a country’s output that is attributed to the
manufacturing sector. HEALTHEXPPC is the value of expenses on health per capita. ELRENEW is a country’s percentage contribution of renewable
energy to the total energy production. ENINT is a country’s energy intensity. ENUSEPC is a country’s energy consumption per capita. Rule of law,
RULELAW, captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of
contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. The measure is standardized between -
2.5 and 2.5. VOICE reflects perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom
of expression, freedom of association, and a free media. The measure is standardized between -2.5 and 2.5. GINI is a country’s Gini inequality index in
percentage. INTPOLICY is a country’s tightness of climate international policies. DOMPOLICY is a country’s tightness of climate domestic policies.
CRI is a country’s index of physical climate risk.
Panel A: Carbon Emissions

Variable Mean Median St. deviation
Log (Carbon Emissions Scope 1 (tons CO2e)) [LOGS1TOT] 10.317 10.135 2.951
Growth Rate in Carbon Emissions Scope 1 (winsorized at 2.5%) [S1CHG] 9.73% 3.34% 41.34%
Panel B: Carbon Emissions: Cross-Correlations

S1CHG S2CHG S3CHG LOGS1TOT LOGS2TOT LOGS3TOT
S1CHG 1
S2CHG 0.485 1
S3CHG 0.555 0.503 1
LOGS1TOT 0.040 -0.004 -0.045 1
LOGS2TOT -0.020 0.045 -0.061 0.736 1
LOGS3TOT -0.047 -0.046 -0.059 0.808 0.824 1
Panel C: Autocorrelations
(1) (2) (3) (4) (5) (6)
VARIABLES LOGS1TOT LOGS2TOT LOGS3TOT LOGS1TOT LOGS2TOT LOGS3TOT
LOGS1TOTt-12 0.981*** 0.640***
(0.002) (0.030)
LOGS2TOTt-12 0.962*** 0.613***
(0.005) (0.029)
LOGS3TOTt-12 0.973*** 0.647***
(0.005) (0.027)
Constant 0.222*** 0.462*** 0.386*** 3.809*** 4.076*** 4.349***
(0.027) (0.069) (0.067) (0.313) (0.301) (0.332)
Year f.e. No No No Yes Yes Yes
Firm f.e. No No No Yes Yes Yes
Observations 64,568 64,575 64,635 61,357 61,366 61,426
R-squared 0.962 0.936 0.973 0.975 0.956 0.983
(1) (2) (3) (4) (5) (6)

VARIABLES S1CHG S2CHG S3CHG S1CHG S2CHG S3CHG
S1CHGt-12 0.016 -0.120***
(0.014) (0.017)
S2CHGt-12 -0.009 -0.135***
(0.012) (0.014)
S3CHGt-12 0.088** -0.068**
(0.029) (0.029)
Constant 0.077*** 0.127*** 0.062*** 0.086*** 0.143*** 0.074***
(0.011) (0.018) (0.019) (0.001) (0.002) (0.002)
Year f.e. No No No Yes Yes Yes
Firm f.e. No No No Yes Yes Yes
Observations 52,175 52,173 52,232 47,912 47,914 47,974
R-squared 0.000 0.000 0.009 0.162 0.164 0.241
50

Panel D: Regression Controls
Variable Mean Median St. deviation
RET (%) 1.076 0.054 10.229
LOGSIZE 11.105 9.644 5.212
B/M (winsorized at 2.5%) 0.572 0.440 0.510
LEVERAGE (winsorized at 2.5%) 0.227 0.209 0.175
MOM (winsorized at 2.5%) 0.136 0.089 0.383
INVEST/A (winsorized at 2.5%) 0.049 0.035 0.048
HHI 0.798 0.985 0.252
LOGPPE 7.748 7.684 3.313
ROE (winsorized at 2.5%) 11.094 10.870 16.076
VOLAT (winsorized at 2.5%) 0.090 0.079 0.051
MSCI 0.337 0 0.473
SALESGR (winsorized at 2.5%) 0.095 0.062 0.240
LTG (winsorized at 1%) 12.80 11.55 11.48
GDPPC 36540.75 44,508 19,253
MANUFPERC (%) 15.93 12.99 7.43
HLTHEXPPC 4235.74 4099.47 3025.87
ELRENEW (%) 5.33 3.83 5.71
ENINT 5.19 5.20 1.66
ENUSEPC 4476.64 3921.90 2186.91
RULELAW 1.15 1.53 0.77
VOICE 0.73 1.03 0.85
GINI (%) 36.96 35.40 6.32
INTPOLICY 0.49 0.58 0.29
DOMPOLICY 0.53 0.51 0.27
CRI 46.84 44.83 25.86
51

Table III
Carbon Emissions by Year
The table reports the annual averages across all countries of all emission variables over the period 2005-2018.
year # firms S1TOT S2TOT S3TOT S1CHG S2CHG S3CHG TOTS1 TOTS2 TOTS3
2005 3232 2391417 246612 1822093 . . . 917000000 106000000 828000000
2006 3532 2367787 264064 1705187 16.18% 18.59% 9.83% 894000000 115000000 749000000
2007 3689 2488889 290500 1800563 18.89% 22.94% 15.94% 934000000 125000000 766000000
2008 3736 2541971 330705 1679148 9.34% 18.13% -0.16% 955000000 146000000 728000000
2009 3949 2285281 311700 1643489 3.24% 8.47% 10.02% 870000000 136000000 720000000
2010 4098 2407166 308070 1633414 14.26% 18.14% 8.34% 904000000 130000000 689000000
2011 4221 2563380 322518 1825353 9.51% 15.73% 14.51% 937000000 136000000 761000000
2012 4253 2402493 317779 1791769 8.71% 10.60% 3.31% 868000000 133000000 748000000
2013 4912 2211603 297793 1619450 7.06% 8.43% 4.06% 878000000 135000000 743000000
2014 5323 2118666 292460 1432881 6.88% 20.46% 4.90% 895000000 142000000 694000000
2015 5427 2009876 276453 1228497 3.87% 2.48% -1.76% 860000000 137000000 604000000
2016 11961 1038161 143425 693127 5.95% 11.13% 10.81% 1130000000 183000000 902000000
2017 12817 1046853 167407 759076 13.60% 26.03% 19.03% 1230000000 221000000 1050000000
2018 8781 1136396 148745 729199 10.53% 12.24% 6.21% 1050000000 142000000 663000000
52

Table IV
Predictors of Carbon Emissions
The sample period is 2005-2018. The dependent variables are carbon emission levels (Panel A) and the growth in emissions (Panel B). All variables are
defined in Tables 1 and 2. We report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year
levels. All regressions include year-month fixed effects and country fixed effects. In columns (4) through (6), we additionally include Trucost industry-
fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
(1) (2) (3) (4) (5) (6)
VARIABLES LOGS1TOT LOGS2TOT LOGS3TOT LOGS1TOT LOGS2TOT LOGS3TOT
LOGSIZE -0.085** 0.265*** 0.210*** 0.329*** 0.472*** 0.453***
(0.039) (0.023) (0.016) (0.020) (0.027) (0.023)
B/M -0.093 0.108** -0.007 0.371*** 0.451*** 0.381***
(0.061) (0.040) (0.037) (0.044) (0.051) (0.047)
ROE 0.010*** 0.011*** 0.014*** 0.008*** 0.008*** 0.009***
(0.002) (0.001) (0.001) (0.001) (0.001) (0.001)
LEVERAGE 0.533** 0.326 -0.363* 0.669*** 0.671*** 0.370***
(0.221) (0.226) (0.170) (0.099) (0.127) (0.097)
INVEST/A 5.021*** 1.079** -1.882*** -1.136*** -1.928*** -3.089***
(0.698) (0.396) (0.300) (0.371) (0.322) (0.287)
HHI -2.038*** -0.763*** -1.232*** -1.216*** -0.660*** -0.722***
(0.145) (0.087) (0.118) (0.074) (0.059) (0.062)
LOGPPE 0.782*** 0.469*** 0.534*** 0.428*** 0.336*** 0.346***
(0.026) (0.014) (0.014) (0.015) (0.016) (0.016)
MSCI 0.119* 0.226*** 0.203*** 0.176*** 0.256*** 0.218***
(0.059) (0.045) (0.041) (0.040) (0.049) (0.042)
Constant 6.359*** 3.850*** 6.456*** 3.902*** 2.415*** 4.555***
(0.383) (0.263) (0.240) (0.215) (0.260) (0.212)
Yr/mo fixed effects Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed effects No No No Yes Yes Yes
Observations 886,751 886,895 887,429 874,592 874,736 875,270
R-squared 0.544 0.531 0.621 0.779 0.715 0.793
Panel B: Growth in Emissions

(1) (2) (3) (4) (5) (6)
VARIABLES S1CHG S2CHG S3CHG S1CHG S2CHG S3CHG
LOGSIZE 0.025*** 0.029*** 0.025*** 0.025*** 0.027*** 0.025***
(0.002) (0.005) (0.002) (0.002) (0.005) (0.003)
B/M -0.060*** -0.061*** -0.066*** -0.067*** -0.069*** -0.070***
(0.009) (0.009) (0.006) (0.009) (0.009) (0.007)
ROE -0.002*** -0.002*** -0.001*** -0.001*** -0.002*** -0.001***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
LEVERAGE 0.060*** 0.064*** 0.049*** 0.060*** 0.063*** 0.043***
(0.015) (0.012) (0.011) (0.012) (0.012) (0.008)
INVEST/A 0.594*** 0.589*** 0.372*** 0.451*** 0.525*** 0.317***
(0.073) (0.098) (0.069) (0.085) (0.063) (0.052)
HHI 0.007 -0.022 0.019*** 0.011* -0.017 0.020***
(0.008) (0.012) (0.005) (0.005) (0.014) (0.004)
LOGPPE -0.021*** -0.021*** -0.020*** -0.023*** -0.022*** -0.021***
(0.003) (0.002) (0.002) (0.003) (0.002) (0.002)
MSCI -0.033*** -0.041*** -0.030*** -0.033*** -0.040*** -0.029***
(0.005) (0.005) (0.005) (0.005) (0.005) (0.004)
Constant 0.004 0.037 -0.025 0.020 0.071 -0.015
(0.024) (0.059) (0.026) (0.024) (0.062) (0.031)
Observations 765,387 765,397 765,949 755,257 755,267 755,819
R-squared 0.036 0.044 0.119 0.047 0.055 0.131
53

Table V
Carbon Emissions and Stock Returns: U.S. and China
The sample period is 2005-2018. The dependent variable is RET measured monthly. The main independent variables are carbon emission levels (Panel A) and the
growth in emissions (Panel B). All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses)
double clustered at the firm and year level. All regressions include year-month fixed effects, country fixed effects, and industry-fixed effects. ***1% significance;
**5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
United States China
LOGS1TOT 0.071*** 0.069**
(0.021) (0.030)
LOGS2TOT 0.075* 0.147*
(0.036) (0.073)
LOGS3TOT 0.126** 0.208*
(0.044) (0.106)
LOGSIZE -0.115 -0.134 -0.159 -0.338*** -0.369*** -0.387***
(0.129) (0.135) (0.138) (0.096) (0.111) (0.114)
B/M 0.535 0.522 0.496 1.003** 0.963** 0.944**
(0.347) (0.340) (0.345) (0.395) (0.373) (0.363)
LEVERAGE -0.453 -0.456 -0.467* -0.113 -0.121 -0.194
(0.266) (0.257) (0.261) (0.198) (0.186) (0.172)
MOM 0.296 0.305 0.307 1.014* 1.005* 0.993*
(0.328) (0.327) (0.328) (0.517) (0.511) (0.501)
INVEST/A 0.407 0.507 0.734 -0.403 -0.150 -0.062
(2.422) (2.420) (2.343) (0.786) (0.866) (0.869)
HHI 0.013 -0.037 0.001 0.610 0.561 0.563
(0.117) (0.093) (0.108) (0.431) (0.418) (0.413)
LOGPPE 0.011 0.014 0.000 0.058 0.038 0.003
(0.043) (0.045) (0.044) (0.079) (0.066) (0.054)
ROE 0.005* 0.005* 0.005 0.026* 0.025* 0.023*
(0.003) (0.003) (0.003) (0.013) (0.012) (0.012)
VOLAT 3.793 3.635 3.715 -2.932 -2.983 -2.829
(3.655) (3.597) (3.636) (1.966) (1.941) (1.911)
Constant 0.548 0.704 0.195 2.882* 2.727 2.251
(0.944) (1.000) (1.003) (1.585) (1.613) (1.814)
Industry fixed effects Yes Yes Yes Yes Yes Yes
Observations 143,367 143,340 143,461 60,210 60,210 60,210
R-squared 0.224 0.224 0.224 0.301 0.301 0.301
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
United States China
S1CHG 0.679*** 0.759**
(0.159) (0.256)
S2CHG 0.294* 0.587**
(0.137) (0.193)
S3CHG 1.254** 1.899***
(0.467) (0.504)
LOGSIZE -0.145 -0.130 -0.163 -0.315*** -0.307*** -0.337***
(0.103) (0.103) (0.103) (0.092) (0.090) (0.098)
B/M 0.560 0.538 0.603* 0.969** 0.903** 1.031**
(0.343) (0.343) (0.320) (0.386) (0.361) (0.382)
LEVERAGE -0.593** -0.567** -0.598** -0.047 -0.002 -0.104
(0.250) (0.251) (0.253) (0.226) (0.218) (0.237)
MOM 0.209 0.238 0.151 0.872 0.876 0.717
(0.331) (0.335) (0.320) (0.509) (0.493) (0.450)
INVEST/A -0.283 -0.086 -0.556 -0.987 -1.312 -1.401
(2.425) (2.374) (2.453) (0.785) (0.754) (0.793)
HHI -0.114 -0.081 -0.125 0.539 0.534 0.426
(0.096) (0.100) (0.096) (0.425) (0.414) (0.395)
LOGPPE 0.074 0.061 0.089 0.091 0.085 0.103
(0.048) (0.046) (0.051) (0.083) (0.083) (0.093)
ROE 0.007** 0.006** 0.007** 0.027* 0.026* 0.026*
(0.003) (0.003) (0.003) (0.013) (0.013) (0.013)
VOLAT 2.678 2.842 2.622 -2.699 -2.833 -2.934
(3.904) (3.895) (3.998) (1.964) (2.031) (2.018)
Constant 1.335 1.264 1.354 3.050* 3.031* 3.198*
(0.753) (0.765) (0.777) (1.604) (1.586) (1.608)
Industry fixed effects Yes Yes Yes Yes Yes Yes
Observations 141,035 140,974 141,106 58,980 58,980 58,980
R-squared 0.227 0.227 0.227 0.303 0.302 0.304
54

Table VI
Carbon Emissions and Stock Returns: Full Sample
The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (Panel A) and the growth
in emissions (Panel B). Panel C includes both levels and changes of respective emissions. In Panel D and E, we consider different (monthly) lag structures
for the measures of emissions. All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in
parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. In columns (4) through
(6), we additionally include industry-fixed effects. Panels D and E only include specifications with the full set of fixed effects. ***1% significance; **5%
significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
LOGS1TOT 0.027 0.063***
(0.021) (0.015)
LOGS2TOT 0.093*** 0.113***
(0.029) (0.027)
LOGS3TOT 0.112*** 0.164***
(0.031) (0.035)
LOGSIZE -0.149*** -0.180*** -0.180*** -0.185*** -0.222*** -0.244***
(0.041) (0.042) (0.043) (0.041) (0.042) (0.044)
B/M 0.519** 0.512** 0.522** 0.630** 0.608** 0.597**
(0.217) (0.215) (0.216) (0.218) (0.212) (0.213)
LEVERAGE -0.426** -0.431** -0.362** -0.373** -0.402** -0.386**
(0.180) (0.167) (0.165) (0.158) (0.146) (0.150)
MOM 1.028** 1.035** 1.035** 1.021** 1.030** 1.033**
(0.365) (0.366) (0.364) (0.370) (0.370) (0.369)
INVEST/A -0.741 -0.693 -0.392 -0.435 -0.275 0.006
(1.102) (1.157) (1.215) (1.064) (1.090) (1.103)
HHI 0.010 0.028 0.097 0.055 0.056 0.102
(0.119) (0.117) (0.114) (0.125) (0.121) (0.127)
LOGPPE -0.002 -0.024 -0.039 0.009 -0.001 -0.020
(0.018) (0.022) (0.023) (0.017) (0.017) (0.018)
ROE 0.014*** 0.013*** 0.012*** 0.013*** 0.013*** 0.013***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
VOLAT 0.129 -0.052 0.009 0.359 0.309 0.334
(3.539) (3.482) (3.522) (3.203) (3.182) (3.201)
Observations 746,499 746,642 747,139 736,711 736,854 737,351
R-squared 0.150 0.150 0.150 0.151 0.151 0.151

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
S1CHG 0.437*** 0.453***
(0.086) (0.088)
S2CHG 0.250*** 0.255***
(0.067) (0.069)
S3CHG 1.157*** 1.175***
(0.278) (0.288)
LOGSIZE -0.156*** -0.153*** -0.170*** -0.170*** -0.166*** -0.183***
(0.041) (0.040) (0.041) (0.039) (0.039) (0.040)
B/M 0.506** 0.500** 0.537** 0.640** 0.633** 0.672**
(0.217) (0.216) (0.217) (0.221) (0.220) (0.220)
LEVERAGE -0.459** -0.444** -0.492** -0.393** -0.379** -0.421**
(0.179) (0.173) (0.173) (0.150) (0.145) (0.144)
MOM 0.958** 0.974** 0.880** 0.944** 0.961** 0.867**
(0.362) (0.363) (0.350) (0.368) (0.369) (0.356)
INVEST/A -1.000 -0.870 -1.180 -0.785 -0.690 -0.963
(1.180) (1.194) (1.204) (1.059) (1.058) (1.058)
HHI -0.046 -0.036 -0.064 -0.033 -0.022 -0.051
(0.127) (0.128) (0.124) (0.122) (0.124) (0.120)
LOGPPE 0.029 0.025 0.041* 0.047** 0.043** 0.060***
(0.021) (0.020) (0.020) (0.017) (0.017) (0.018)
ROE 0.014*** 0.014*** 0.014*** 0.014*** 0.014*** 0.014***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
VOLAT -0.146 -0.059 -0.175 0.182 0.252 0.169
(3.602) (3.619) (3.670) (3.258) (3.274) (3.308)
Observations 735,359 735,362 735,903 725,745 725,748 726,289
R-squared 0.151 0.151 0.152 0.153 0.153 0.153
55

Panel C: Joint Regressions
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
LOGS1TOT 0.016 0.046***
(0.021) (0.014)
S1CHG 0.429*** 0.430***
(0.086) (0.087)
LOGS2TOT 0.082** 0.099***
(0.029) (0.025)
S2CHG 0.221*** 0.213***
(0.068) (0.069)
LOGS3TOT 0.104*** 0.150***
(0.029) (0.033)
S3CHG 1.138*** 1.135***
(0.279) (0.285)
Controls Yes Yes Yes Yes Yes Yes
Observations 735,121 735,206 735,903 725,507 725,592 726,289
R-squared 0.151 0.151 0.152 0.153 0.153 0.153
Panel D: Alternative Lags (Levels)

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9)
Lag 3 Lag 6 Lag 12
LOGS1TOT 0.056*** 0.042** 0.023
(0.016) (0.015) (0.015)
LOGS2TOT 0.108*** 0.095*** 0.074**
(0.027) (0.028) (0.025)
LOGS3TOT 0.149*** 0.117*** 0.080**
(0.035) (0.032) (0.027)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 736,433 736,552 737,057 736,023 736,106 736,623 735,197 735,208 735,749
R-squared 0.151 0.151 0.151 0.151 0.151 0.151 0.151 0.151 0.151
Panel E: Alternative Lags (Changes)

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9)
Lag 3 Lag 6 Lag 12
S1CHG 0.377*** 0.259*** -0.078
(0.078) (0.074) (0.075)
S2CHG 0.214** 0.165** -0.054
(0.070) (0.074) (0.058)
S3CHG 1.009*** 0.684** -0.079
(0.273) (0.310) (0.188)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 703,278 703,267 703,806 669,337 669,305 669,841 600,010 599,938 600,466
R-squared 0.155 0.155 0.156 0.160 0.160 0.160 0.172 0.172 0.172
56

Table VII
Carbon Emissions and Stock Book-to-Market Ratios: Full Sample
The sample period is 2005-2018. The dependent variable is LNBM. The main independent variables are carbon emission levels (Panel A) and the growth
in emissions (Panel B). All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses)
double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. In columns 4 through 6, we
additionally include industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: LNBM (1) (2) (3) (4) (5) (6)
LOGS1TOT 0.021** 0.056***
(0.007) (0.009)
LOGS2TOT -0.005 0.057***
(0.010) (0.009)
LOGS3TOT 0.016 0.079***
(0.014) (0.012)
MSCI -0.208*** -0.173*** -0.203*** -0.235*** -0.255*** -0.274***
(0.034) (0.036) (0.035) (0.031) (0.033) (0.033)
MOM -0.634*** -0.623*** -0.631*** -0.596*** -0.591*** -0.597***
(0.070) (0.069) (0.069) (0.057) (0.055) (0.056)
VOLAT 1.982** 1.928** 1.965*** 2.151*** 2.028*** 2.197***
(0.629) (0.623) (0.618) (0.426) (0.410) (0.399)
SALESGR -0.496*** -0.513*** -0.504*** -0.487*** -0.498*** -0.498***
(0.058) (0.056) (0.057) (0.058) (0.058) (0.058)
SALESGRt+12 -0.376*** -0.411*** -0.389*** -0.307*** -0.311*** -0.290***
(0.037) (0.046) (0.044) (0.038) (0.038) (0.037)
SALESGRt+24 -0.351*** -0.384*** -0.361*** -0.282*** -0.282*** -0.269***
(0.069) (0.075) (0.074) (0.046) (0.049) (0.046)
LTG -0.012*** -0.013*** -0.013*** -0.008*** -0.008*** -0.008***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.001)
Observations 88,390 88,349 88,426 87,093 87,052 87,129
R-squared 0.263 0.259 0.260 0.475 0.474 0.477

DEP. VAR.: LNBM (1) (2) (3) (4) (5) (6)
S1CHG 0.066*** 0.029
(0.020) (0.021)
S2CHG 0.045*** 0.022*
(0.013) (0.012)
S3CHG 0.030 -0.027
(0.123) (0.037)
MSCI -0.180*** -0.181*** -0.180*** -0.165*** -0.165*** -0.165***
(0.033) (0.033) (0.033) (0.029) (0.029) (0.029)
MOM -0.624*** -0.624*** -0.624*** -0.587*** -0.587*** -0.587***
(0.069) (0.069) (0.069) (0.056) (0.056) (0.056)
VOLAT 1.909** 1.917** 1.916** 1.884*** 1.882*** 1.884***
(0.623) (0.623) (0.628) (0.457) (0.457) (0.456)
SALESGR -0.566*** -0.552*** -0.541*** -0.524*** -0.521*** -0.473***
(0.063) (0.052) (0.134) (0.072) (0.060) (0.076)
SALESGRt+12 -0.411*** -0.412*** -0.406*** -0.349*** -0.350*** -0.347***
(0.044) (0.044) (0.044) (0.041) (0.040) (0.039)
SALESGRt+24 -0.379*** -0.379*** -0.379*** -0.327*** -0.325*** -0.327***
(0.071) (0.071) (0.071) (0.053) (0.054) (0.052)
LTG -0.013*** -0.013*** -0.013*** -0.009*** -0.009*** -0.009***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
Observations 88,414 88,338 88,426 87,117 87,041 87,129
R-squared 0.260 0.260 0.259 0.466 0.466 0.466
57

Table VIII
Carbon Emissions and Stock Returns: Regional
in firm-level total emissions (Panel B). All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard
errors (in parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. All regression
models include the controls of Table 6 (unreported for brevity). In columns (4)-(6), we additionally include Trucost industry-fixed effects. ***1%
significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
LOGS1TOT -0.001 0.041
(0.031) (0.024)
LOGS2TOT 0.065 0.092**
(0.038) (0.036)
LOGS3TOT 0.075 0.132***
(0.043) (0.042)
Namerica* LOGS1TOT 0.042* 0.043*
(0.020) (0.020)
Namerica* LOGS2TOT 0.051 0.044
(0.039) (0.037)
Namerica* LOGS3TOT 0.065 0.059
(0.042) (0.043)
Europe*LOGS1TOT 0.028 0.019
(0.019) (0.020)
(0.029) (0.031)
(0.031) (0.033)
Asia*LOGS1TOT 0.029 0.020
(0.022) (0.021)
(0.036) (0.036)
(0.039) (0.041)
Observations 746,499 746,642 747,139 736,711 736,854 737,351
R-squared 0.150 0.150 0.150 0.151 0.151 0.152

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
S1CHG 0.230** 0.275**
(0.098) (0.112)
S2CHG 0.054 0.078
(0.090) (0.098)
S3CHG 0.780** 0.843**
(0.349) (0.383)
Namerica* S1CHG 0.362** 0.341**
(0.138) (0.136)
Namerica* S2CHG 0.211* 0.193
(0.114) (0.112)
Namerica* S3CHG 0.499 0.464
(0.337) (0.345)
Europe* S1CHG -0.010 -0.050
(0.091) (0.099)
Europe* S2CHG 0.039 0.020
(0.115) (0.120)
Europe* S3CHG 0.007 -0.028
(0.457) (0.464)
Asia* S1CHG 0.322** 0.287*
(0.142) (0.142)
Asia* S2CHG 0.340*** 0.314**
(0.104) (0.105)
Asia* S3CHG 0.607 0.541
(0.420) (0.430)
Observations 735,359 735,362 735,903 725,745 725,748 726,289
R-squared 0.151 0.151 0.152 0.153 0.153 0.153
58

Table IX
Carbon Emissions and Stock Returns: Economic Development
The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (Panel A) and the growth in emissions (Panel B). GDPPC
measures a country’s GDP per capita in current dollars in a given year; MANUFPERC is the percentage of a country’s GDP that is produced in a given year in manufacturing sector;
HLTHEXPPC is a country’s health expenditures per capita in current dollars in a given year. All other variables are defined in Table 1 and Table 2. We report the results of the pooled
regression with standard errors (in parentheses) double clustered at the firm and year level. All regression models include the controls of Table 6 (unreported for brevity), year-month
fixed effects, and country fixed effects. In selected columns, we additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
GDPPC -106.966** -107.168** -102.286** -102.108**

(50.082) (50.443) (50.288) (50.647)
MANUFPERC 13.721 15.378* 14.549* 16.083*
(8.422) (8.635) (8.418) (8.586)
HLTHEXPPC -0.048 -0.130 -0.040 -0.106
(0.195) (0.202) (0.193) (0.196)
LOGS1TOT 0.030 0.064*** 0.030 0.072*** 0.009 0.047**
(0.021) (0.018) (0.023) (0.019) (0.022) (0.018)
LOGS3TOT 0.118*** 0.170*** 0.136*** 0.191*** 0.079** 0.131***
(0.032) (0.033) (0.032) (0.033) (0.031) (0.034)
GDPPC*LOGS1TOT -0.113 -0.101
(0.418) (0.402)
GDPPC*LOGS3TOT -0.210 -0.272
(0.655) (0.612)
MANUFPERC*LOGS1TOT -0.028 -0.068
(0.112) (0.106)
MANUFPERC*LOGS3TOT -0.139 -0.161
(0.173) (0.164)
HLTHEXPPC*LOGS1TOT 0.003 0.003
(0.003) (0.003)
HLTHEXPPC*LOGS3TOT 0.008* 0.007
(0.005) (0.005)
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects No No Yes Yes No No Yes Yes No No Yes Yes
Observations 712,325 712,965 702,742 703,382 679,747 680,362 671,251 671,866 484,562 485,071 478,735 479,244
R-squared 0.150 0.150 0.152 0.152 0.152 0.152 0.153 0.153 0.175 0.175 0.177 0.177

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
GDPPC -112.536** -115.011** -107.466** -109.815**
(50.414) (50.457) (50.642) (50.689)
MANUFPERC 11.674 10.472 12.035 10.880
(8.243) (8.228) (8.256) (8.244)
HLTHEXPPC -0.044 -0.072 -0.034 -0.064
(0.194) (0.196) (0.193) (0.195)
S1CHG 0.587*** 0.600*** 0.088 0.112 0.654*** 0.688***
(0.112) (0.112) (0.101) (0.102) (0.131) (0.131)
S3CHG 1.485*** 1.505*** 0.492* 0.543** 1.439*** 1.501***
(0.263) (0.266) (0.266) (0.264) (0.287) (0.291)
GDPPC*S1CHG -4.601* -4.510*
(2.466) (2.461)
GDPPC*S3CHG -11.536* -11.598*
(6.250) (6.250)
MANUFPERC*S1CHG 2.230*** 2.163***
(0.621) (0.625)
MANUFPERC * S3CHG 3.863*** 3.650**
(1.453) (1.454)
HLTHEXPPC*S1CHG -0.045* -0.047**
(0.024) (0.024)
HLTHEXPPC*S3CHG -0.093 -0.098*
(0.058) (0.057)
Observations 701,797 702,341 692,387 692,931 669,831 670,340 661,480 661,989 479,950 480,373 474,176 474,599
R-squared 0.151 0.152 0.153 0.153 0.153 0.153 0.154 0.155 0.175 0.176 0.177 0.177
59

Table X
Carbon Emissions and Stock Returns: Energy Structure
The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (Panel A) and the growth in emissions (Panel B). ELRENEW
measures a country’s share of electricity generated by renewable power plants in total electricity generated by all types of plants in a given year; ENINT is the ratio between energy supply
and gross domestic product measured at purchasing power parity in a given country. Energy intensity is an indication of how much energy is used to produce one unit of economic
output in a given year; ENUSEPC is a country’s energy consumption (in kg of oil equivalent per capita) in a given year. All other variables are defined in Table 1 and Table 2. We report
the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. All regression models include the controls of Table 6 (unreported
for brevity), year-month fixed effects, and country fixed effects. In selected columns, we additionally include industry-fixed effects. ***1% significance; **5% significance; *10%
significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
ELRENEW 7.809* 2.588 8.161* 2.322
(4.150) (5.042) (4.164) (5.059)
ENINT -7.864 2.400 -9.565 5.223
(60.851) (61.263) (60.818) (61.358)
ENUSEPC -1.386** -1.427** -1.442*** -1.411**
(0.545) (0.550) (0.546) (0.554)
LOGS1TOT 0.006 0.059*** 0.030 0.069** -0.005 0.038*
(0.024) (0.020) (0.028) (0.027) (0.024) (0.021)
LOGS3TOT 0.077** 0.132*** 0.162*** 0.222*** 0.085** 0.153***
(0.030) (0.034) (0.052) (0.053) (0.039) (0.041)
ELRENEW*LOGS1TOT 0.028 0.010
(0.175) (0.176)
ELRENEW*LOGS3TOT 0.480* 0.518*
(0.288) (0.289)
ENINT*LOGS1TOT -0.443 -0.209
(0.551) (0.525)
ENINT*LOGS3TOT -1.198 -1.299
(0.844) (0.840)
ENUSEPC*LOGS1TOT 0.004 0.005
(0.005) (0.005)
ENUSEPC*LOGS3TOT 0.006 0.002
(0.007) (0.007)
Observations 438,446 438,918 433,249 433,721 438,488 438,960 433,291 433,763 423,298 423,770 418,233 418,705
R-squared 0.185 0.186 0.187 0.187 0.185 0.185 0.187 0.187 0.190 0.190 0.192 0.192

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
ELRENEW 8.254** 8.221** 8.434** 8.389**
(3.387) (3.381) (3.401) (3.395)
ENINT -25.255 -29.735 -24.552 -29.244
(60.766) (60.556) (60.724) (60.459)
ENUSEPC -1.397** -1.385** -1.446** -1.431**
(0.553) (0.552) (0.553) (0.553)
S1CHG 0.597*** 0.644*** 0.021 0.039 0.313** 0.316**
(0.113) (0.114) (0.199) (0.199) (0.155) (0.153)
S3CHG 1.201*** 1.294*** 0.113 0.158 0.728* 0.760**
(0.289) (0.289) (0.400) (0.395) (0.373) (0.372)
ELRENEW*S1CHG -1.839* -2.068*
(1.087) (1.089)
ELRENEW*S3CHG 0.005 -0.502
(2.671) (2.675)
ENINT*S1CHG 9.254** 9.562**
(4.009) (4.037)
ENINT*S3CHG 20.786*** 21.199***
(7.830) (7.854)
ENUSEPC*S1CHG 0.036 0.044
(0.033) (0.033)
ENUSEPC*S3CHG 0.097 0.107
(0.083) (0.082)
Observations 433,851 434,226 428,710 429,085 433,893 434,268 428,752 429,127 418,791 419,166 413,782 414,157
R-squared 0.186 0.186 0.188 0.188 0.186 0.186 0.188 0.188 0.190 0.191 0.192 0.193
60

Table XI
Carbon Emissions and Stock Returns: Socio-political Environment
The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (Panel A) and the growth in emissions (Panel B).
RULELAW measures a country’s perceptions in a given year of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract
enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. Estimate gives the country's score on the aggregate indicator, in units of a
standard normal distribution; VOICE captures perceptions in a given year of the extent to which a country's citizens are able to participate in selecting their government, as well as
freedom of expression, freedom of association, and a free media. Estimate gives the country's score on the aggregate indicator, in units of a standard normal distribution; GINI is a
country’s GINI index in a given year. All other variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double
clustered at the firm and year level. All regression models include the controls of Table 6 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected
columns, we additionally include industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
RULELAW -0.677 -0.721 -0.660 -0.705
(0.752) (0.766) (0.755) (0.776)
VOICE -0.700 -0.676 -0.723 -0.697
(0.805) (0.822) (0.803) (0.828)
GINI -6.619 -7.181 -6.753 -7.776
(12.017) (11.998) (12.000) (11.998)
LOGS1TOT 0.026 0.061*** 0.031* 0.067*** 0.020 0.023
(0.017) (0.015) (0.017) (0.014) (0.081) (0.081)
LOGS3TOT 0.108*** 0.162*** 0.120*** 0.173*** 0.085 0.081
(0.025) (0.028) (0.024) (0.027) (0.115) (0.115)
RULELAW*LOGS1TOT 0.002 0.002
(0.009) (0.009)
RULELAW*LOGS3TOT 0.004 0.003
(0.015) (0.015)
VOICE*LOGS1TOT -0.005 -0.006
(0.011) (0.011)
VOICE*LOGS3TOT -0.009 -0.010
(0.018) (0.018)
GINI*LOGS1TOT 0.027 0.124
(0.219) (0.219)
GINI*LOGS3TOT 0.069 0.195
(0.296) (0.302)
Observations 746,289 746,929 736,501 737,141 746,289 746,929 736,501 737,141 238,048 238,236 235,027 235,215
R-squared 0.150 0.150 0.151 0.152 0.150 0.150 0.151 0.152 0.195 0.195 0.198 0.198

DEP. VAR.: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
RULELAW -0.627 -0.606 -0.610 -0.587
(0.743) (0.744) (0.743) (0.745)
VOICE -0.778 -0.782 -0.806 -0.804
(0.811) (0.815) (0.811) (0.816)
GINI -7.074 -8.585 -6.232 -7.788
(12.484) (12.489) (12.425) (12.419)
S1CHG 0.599*** 0.613*** 0.535*** 0.547*** -0.469 -0.402
(0.097) (0.097) (0.075) (0.075) (0.396) (0.399)
S3CHG 1.512*** 1.524*** 1.327*** 1.339*** -1.072 -0.887
(0.226) (0.228) (0.179) (0.180) (1.024) (1.020)
RULELAW*S1CHG -0.145** -0.144**
(0.060) (0.060)
RULELAW*S3CHG -0.331** -0.326**
(0.151) (0.150)
VOICE * S1CHG -0.145*** -0.140***
(0.051) (0.051)
VOICE * S3CHG -0.275** -0.266**
(0.130) (0.130)
GINI * S1CHG 2.521** 2.378**
(1.075) (1.084)
GINI * S3CHG 6.030** 5.687**
(2.677) (2.675)
Observations 735,150 735,694 725,536 726,080 735,150 735,694 725,536 726,080 236,017 236,159 233,026 233,168
R-squared 0.151 0.152 0.153 0.153 0.151 0.152 0.153 0.153 0.196 0.196 0.199 0.199
61

Table XII
Carbon Emissions and Stock Returns: Climate Policy Tightness
in emissions (Panel B). INTPOLICY measures the strictness of a country’s international climate policy in a given year. DOMPOLICY measures the
strictness of a country’s domestic climate policy in a given year. All other variables are defined in Table 1 and Table 2. We report the results of the pooled
regression with standard errors (in parentheses) double clustered at the firm and year level. All regression models include the controls of Table 6
(unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we additionally include Trucost industry-fixed effects.
***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
INTPOLICY -0.684 -1.171 -0.624 -1.272
(0.387) (1.009) (0.384) (0.983)
DOMPOLICY -1.087* -2.634** -1.094* -2.723**
(0.566) (1.014) (0.535) (0.971)
LOGS1TOT 0.044* 0.083*** 0.001 0.037
(0.023) (0.022) (0.024) (0.027)
LOGS3TOT 0.123*** 0.171*** 0.041 0.088**
(0.038) (0.040) (0.027) (0.030)
INTPOLICY*LOGS1TOT -0.015 -0.020
(0.040) (0.041)
INTPOLICY*LOGS3TOT 0.027 0.035
(0.086) (0.084)
DOMPOLICY*LOGS1TOT 0.064 0.065
(0.050) (0.048)
DOMPOLICY*LOGS3TOT 0.181** 0.188**
(0.076) (0.072)
Controls Yes Yes Yes Yes Yes Yes Yes Yes
Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects No No Yes Yes No No Yes Yes
Observations 551,075 551,642 544,127 544,694 551,075 551,642 544,127 544,694
R-squared 0.153 0.153 0.155 0.155 0.153 0.153 0.154 0.155

DEP. VAR.: RET (1) (2) (3) (4) (5) (6) (7) (8)
INTPOLICY -0.852** -0.892** -0.842** -0.891**
(0.314) (0.302) (0.316) (0.306)
DOMPOLICY -0.386 -0.430 -0.383 -0.430
(0.272) (0.280) (0.280) (0.289)
S1CHG 0.570*** 0.593*** 0.475*** 0.492***
(0.125) (0.109) (0.121) (0.105)
S3CHG 1.264** 1.252** 0.984 0.998*
(0.534) (0.513) (0.573) (0.542)
INTPOLICY*S1CHG -0.175 -0.176
(0.186) (0.170)
INTPOLICY*S3CHG -0.119 -0.038
(0.574) (0.555)
DOMPOLICY* S1CHG -0.001 0.011
(0.201) (0.194)
DOMPOLICY* S3CHG 0.364 0.395
(0.711) (0.679)
Observations 544,610 545,073 537,766 538,229 544,610 545,073 537,766 538,229
R-squared 0.155 0.155 0.156 0.157 0.154 0.155 0.156 0.157
62

Table XIII
Carbon Emissions and Stock Returns: Reputational Risk
The sample period is 2005-2018. SALIENT is an indicator variable equal to one for all companies in the oil & gas (gic=2), utilities (gic=65-69), and motor (gic=18, 19, 23) industries, and
zero for companies in all other industries. The dependent variable is RET. The main independent variables are carbon emission levels (columns (1)-(4)) and the growth in emissions
(columns (5)-(8)), all interacted with SALIENT. All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double
clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. All regression models include the controls of Table 6 (unreported for brevity).
In even-numbered columns, we additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VAR.: RET (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT 0.047 0.073**
(0.032) (0.024)
SALIENT 0.417 0.945 0.331 0.350 0.247 0.202 0.142 0.095
(0.530) (0.651) (0.328) (0.403) (0.156) (0.155) (0.119) (0.113)
SALIENT*LOGS1TOT -0.006 -0.006
(0.040) (0.028)
LOGS3TOT 0.159*** 0.176***
(0.034) (0.036)
SALIENT*LOGS3TOT -0.053 -0.013
(0.045) (0.033)
S1CHG 0.433** 0.472**
(0.191) (0.200)
SALIENT*S1CHG 0.010 -0.020
(0.205) (0.209)
S3CHG 0.555 0.601
(0.404) (0.412)
SALIENT*S3CHG 0.710* 0.671*
(0.369) (0.367)
Industry fixed effects No Yes No Yes No Yes No Yes
Observations 744,864 745,504 735,109 735,749 733,724 734,268 724,143 724,687
R-squared 0.150 0.150 0.151 0.151 0.151 0.152 0.153 0.153
Table XIV
Carbon Emissions and Stock Returns: The Role of Investor Awareness
The dependent variable is RET. The main independent variables are carbon emission levels (columns 1-4) and the growth in emissions (columns 5-8). All variables are defined in
Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. Paris is an indicator variable equal
to zero for the period January 2014-November 2015 (two years before Paris COP 21 conference) and equal to one for the period January 2016-December 2017 (two years after Paris
COP 21 conference). All regression models include the controls of Table 6 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we
additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT -0.045 -0.017
(0.031) (0.031)
LOGS3TOT 0.060 0.119**
(0.047) (0.050)
S1CHG 0.658*** 0.662***
(0.158) (0.157)
S3CHG 1.864*** 1.856***
(0.344) (0.350)
Paris*LOGS1TOT 0.132*** 0.133***
(0.048) (0.048)
Paris*LOGS3TOT 0.098* 0.101*
(0.053) (0.054)
Paris*S1CHG -0.207 -0.198
(0.210) (0.211)
Paris*S3CHG -0.716 -0.757
(0.528) (0.550)
Observations 301,993 302,309 298,113 298,429 295,469 295,780 291,686 291,997
R-squared 0.061 0.061 0.064 0.064 0.062 0.062 0.065 0.065
63

Table XV
Carbon Total Firm Emissions and Stock Returns: Awareness (Regional)
The dependent variable is monthly RET. The main independent variable is carbon emission level. All variables are defined in Table 1 and Table 2. We
report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. Paris is an indicator variable
equal to zero for the period January 2014-November 2015 (two years before Paris COP 21 conference) and equal to one for the period January 2016-
December 2017 (two years after Paris COP 21 conference). All regression models include the controls of Table 6 (unreported for brevity), year-month
fixed effects, and country fixed effects. In selected columns, we additionally include Trucost industry-fixed effects. Panel A samples firms from North
America, Panel B from Europe, Panel C from Asia, and Panel D all the remaining countries. ***1% significance; **5% significance; *10% significance.
Panel A: North America

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
North America North America (excl. USA)
LOGS1TOT -0.035 -0.013 -0.078 0.009
(0.059) (0.060) (0.078) (0.089)
LOGS3TOT 0.106 0.071 0.209 0.196
(0.093) (0.104) (0.125) (0.159)
Paris*LOGS1TOT 0.083 0.079 0.072 0.090
(0.081) (0.077) (0.115) (0.122)
Paris*LOGS3TOT -0.052 -0.044 -0.211 -0.190
(0.109) (0.102) (0.163) (0.170)
Observations 74,410 74,503 73,442 73,535 12,978 13,025 12,876 12,923
R-squared 0.090 0.090 0.098 0.098 0.105 0.106 0.119 0.120
Panel B: Europe
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
Europe EU
LOGS1TOT -0.022 -0.011 -0.022 -0.011
(0.041) (0.043) (0.041) (0.043)
LOGS3TOT 0.099 0.176** 0.099 0.176**
(0.069) (0.079) (0.069) (0.079)
Paris*LOGS1TOT 0.089 0.091 0.089 0.091
(0.061) (0.061) (0.061) (0.061)
Paris*LOGS3TOT 0.065 0.062 0.065 0.062
(0.083) (0.082) (0.083) (0.082)
Observations 63,965 64,034 62,911 62,980 63,965 64,034 62,911 62,980
R-squared 0.097 0.097 0.105 0.105 0.097 0.097 0.105 0.105
Panel C: Asia
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
Asia Asia (excl. China)
LOGS1TOT -0.055 -0.034 -0.031 -0.025
(0.033) (0.036) (0.029) (0.030)
LOGS3TOT 0.007 0.097 0.077 0.147*
(0.057) (0.067) (0.073) (0.078)
Paris*LOGS1TOT 0.161*** 0.166*** 0.128*** 0.132***
(0.052) (0.051) (0.041) (0.041)
Paris*LOGS3TOT 0.208*** 0.216*** 0.089 0.092
(0.071) (0.074) (0.081) (0.083)
Observations 134,732 134,814 133,201 133,283 105,375 105,457 103,988 104,070
R-squared 0.078 0.078 0.082 0.083 0.062 0.062 0.067 0.067
64

Panel D: Others
DEP. VARIABLE: RET (1) (2) (3) (4)
Others
LOGS1TOT -0.163*** -0.055
(0.057) (0.084)
LOGS3TOT -0.129 -0.000
(0.081) (0.112)
Paris*LOGS1TOT 0.271*** 0.267***
(0.083) (0.087)
Paris*LOGS3TOT 0.268** 0.253**
(0.109) (0.109)
Controls Yes Yes Yes Yes
Yr/mo fixed effects Yes Yes Yes Yes
Country fixed effects Yes Yes Yes Yes
Industry fixed effects No No Yes Yes
Observations 28,251 28,323 27,924 27,996
R-squared 0.067 0.067 0.078 0.077
65

Internet Appendix for
“Global Pricing of Carbon-Transition Risk”
PATRICK BOLTON and MARCIN KACPERCZYK20
ABSTRACT
This Internet Appendix provides additional results supporting and supplementing the analysis in “Global
Pricing of Carbon-Transition Risk” published in the Journal of Finance.
20Bolton, Patrick, and Marcin Kacperczyk, Internet Appendix for “Global Pricing of Carbon-Transition Risk,” Journal of
Finance, DOI: 10.1111/jofixxx. Please note: Wiley-Blackwell is not responsible for the content or functionality of any
additional information provided by the authors. Any queries (other than missing material) should be directed to the authors
of the article.
66

Table A.1: Industry Representation
The table reports the distribution of unique firms in our sample with regard to GIC 6 industry classification. #Co. represents the total number of firms
in each industry. The sample period is 2005-2018.
Industry GICSIX # Co.
Energy Equipment & Services 1 170
Oil, Gas & Consumable Fuels 2 467
Chemicals 3 530
Construction Materials 4 162
Containers & Packaging 5 102
Metals & Mining 6 506
Paper & Forest Products 7 92
Aerospace & Defense 8 99
Building Products 9 165
Construction & Engineering 10 380
Electrical Equipment 11 282
Industrial Conglomerates 12 144
Machinery 13 580
Trading Companies & Distributors 14 195
Commercial Services & Supplies 15 261
Professional Services 16 150
Air Freight & Logistics 17 70
Airlines 18 75
Marine 19 87
Road & Rail 20 115
Transportation Infrastructure 21 124
Auto Components 22 313
Automobiles 23 75
Household Durables 24 270
Leisure Products 25 73
Textiles, Apparel & Luxury Goods 26 262
Hotels, Restaurants & Leisure 27 359
Diversified Consumer Services 28 105
Media 29 325
Distributors 30 64
Internet & Direct Marketing Retail 31 92
Multiline Retail 32 117
Specialty Retail 33 354
Food & Staples Retailing 34 200
Beverages 35 126
Food Products 36 440
Tobacco 37 25
Household Products 38 41
Personal Products 39 100
Health Care Equipment & Supplies 40 229
Health Care Providers & Services 41 224
Health Care Technology 42 35
Biotechnology 43 273
Pharmaceuticals 44 371
Life Sciences Tools & Services 45 61
Banks 46 679
Thrifts & Mortgage Finance 47 70
Diversified Financial Services 48 180
Consumer Finance 49 116
Capital Markets 50 351
Mortgage Real Estate Investment Trusts (REITs) 51 2
Insurance 52 234
Internet Software & Services 53 180
IT Services 54 301
Software 55 367
Communications Equipment 56 154
Technology Hardware, Storage & Peripherals 57 167
Electronic Equipment, Instruments & Components 58 520
Semiconductors & Semiconductor Equipment 59 398
Diversified Telecommunication Services 60 131
Wireless Telecommunication Services 61 74
Media 62 142
Entertainment 63 114
Interactive Media & Services 64 36
Electric Utilities 65 159
67

Gas Utilities 66 66
Multi-Utilities 67 57
Water Utilities 68 44
Independent Power and Renewable Electricity Producers 69 152
Equity Real Estate Investment Trusts (REITs) 70 274
Real Estate Management & Development 71 619
Table A.2: Changes in Carbon Emissions and Stock Returns: Alternative Winsorization
The sample period is 2005-2018. The dependent variable is monthly RET. The main independent variable is the percentage change in emissions
winsorized at the 1% level. All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in
parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. In columns (4) through
(6), we additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)

S1CHG 0.192*** 0.201***
(0.043) (0.045)
S2CHG 0.074*** 0.077**
(0.024) (0.026)
S3CHG 0.783*** 0.798***
(0.180) (0.188)
LOGSIZE -0.153*** -0.150*** -0.167*** -0.167*** -0.163*** -0.181***
(0.040) (0.040) (0.041) (0.039) (0.039) (0.040)
B/M 0.497** 0.493** 0.527** 0.630** 0.626** 0.661**
(0.217) (0.217) (0.217) (0.220) (0.220) (0.220)
LEVERAGE -0.446** -0.434** -0.479** -0.379** -0.367** -0.408**
(0.178) (0.174) (0.175) (0.149) (0.146) (0.146)
MOM 0.980** 0.991** 0.913** 0.966** 0.977** 0.899**
(0.365) (0.366) (0.356) (0.370) (0.372) (0.361)
INVEST/A -0.904 -0.782 -1.106 -0.702 -0.606 -0.879
(1.184) (1.188) (1.200) (1.058) (1.055) (1.056)
HHI -0.039 -0.037 -0.051 -0.026 -0.023 -0.038
(0.126) (0.127) (0.125) (0.122) (0.122) (0.121)
LOGPPE 0.026 0.022 0.040* 0.044** 0.040** 0.059***
(0.021) (0.020) (0.020) (0.016) (0.017) (0.018)
ROE 0.014*** 0.014*** 0.015*** 0.014*** 0.014*** 0.015***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
VOLAT -0.085 -0.014 -0.221 0.235 0.293 0.116
(3.605) (3.610) (3.650) (3.262) (3.266) (3.293)
Observations 735,359 735,362 735,903 725,745 725,748 726,289
R-squared 0.151 0.151 0.152 0.152 0.152 0.153
68

Table A.3: Carbon Emission Intensity and Stock Returns: Full Sample
The sample period is 2005-2018. The dependent variable is monthly RET. The main independent variable is carbon emissions intensity. All variables are
defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year
level. All regressions include year-month fixed effects and country fixed effects. In columns (4) through (6), we additionally include Trucost industry-
fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)

S1INT -0.007 -0.001
(0.007) (0.004)
S2INT 0.012 -0.002
(0.087) (0.045)
S3INT 0.018 0.010
(0.017) (0.018)
LOGSIZE -0.156*** -0.151*** -0.145*** -0.163*** -0.163*** -0.162***
(0.041) (0.041) (0.040) (0.040) (0.041) (0.041)
B/M 0.522** 0.518** 0.523** 0.654** 0.654** 0.654**
(0.215) (0.215) (0.219) (0.220) (0.220) (0.220)
LEVERAGE -0.394* -0.414** -0.406** -0.330* -0.331* -0.330*
(0.185) (0.178) (0.172) (0.165) (0.162) (0.162)
MOM 1.035** 1.031** 1.028** 1.022** 1.022** 1.021**
(0.366) (0.367) (0.366) (0.372) (0.372) (0.372)
INVEST/A -0.524 -0.618 -0.621 -0.486 -0.488 -0.491
(1.138) (1.070) (1.153) (1.051) (1.047) (1.055)
HHI -0.073 -0.046 -0.025 -0.024 -0.023 -0.018
(0.119) (0.120) (0.108) (0.118) (0.120) (0.119)
LOGPPE 0.026 0.019 0.015 0.037** 0.037** 0.036**
(0.019) (0.018) (0.018) (0.016) (0.016) (0.016)
ROE 0.014*** 0.014*** 0.014*** 0.014*** 0.014*** 0.014***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
VOLAT 0.158 0.155 0.155 0.356 0.357 0.357
(3.536) (3.508) (3.535) (3.201) (3.200) (3.201)
Observations 747,139 747,139 747,139 737,351 737,351 737,351
R-squared 0.150 0.150 0.150 0.151 0.151 0.151
69

Table A4. Carbon Emissions and Stock Returns: Annual Frequency
The sample period is 2005-2018. The dependent variable is annual RET. The main independent variable is carbon emissions intensity. All variables are defined in Table 1 and Table 2. We
report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. All regressions include year fixed effects and country fixed effects.
In columns (4) through (6), we additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
LOGS1TOT 0.003 0.009***
(0.002) (0.002)
LOGS1TOTt-1 -0.000 0.003*
(0.003) (0.002)
LOGS2TOT 0.011** 0.016***
(0.004) (0.003)
LOGS2TOTt-1 0.007* 0.010***
(0.004) (0.003)
LOGS3TOT 0.013*** 0.024***
(0.004) (0.005)
LOGS3TOTt-1 0.007* 0.011***
(0.003) (0.003)
LOGSIZE -0.024** -0.024** -0.030*** -0.028*** -0.027*** -0.026*** -0.036*** -0.032*** -0.027*** -0.026*** -0.039*** -0.033***
(0.008) (0.008) (0.009) (0.009) (0.008) (0.008) (0.009) (0.009) (0.008) (0.008) (0.010) (0.009)
B/M 0.048* 0.047* 0.061** 0.062** 0.047* 0.046* 0.057** 0.058** 0.048* 0.047* 0.055** 0.059**
(0.024) (0.024) (0.024) (0.024) (0.024) (0.023) (0.023) (0.023) (0.024) (0.023) (0.023) (0.023)
LEVERAGE -0.073** -0.070** -0.074*** -0.069** -0.074*** -0.072** -0.079*** -0.072*** -0.066** -0.068** -0.077*** -0.071**
(0.025) (0.025) (0.024) (0.024) (0.024) (0.024) (0.023) (0.023) (0.023) (0.024) (0.023) (0.024)
MOM 0.052 0.053 0.053 0.054 0.053 0.053 0.054 0.055 0.053 0.054 0.054 0.055
(0.036) (0.036) (0.036) (0.037) (0.036) (0.035) (0.036) (0.036) (0.036) (0.036) (0.036) (0.037)
INVEST/A -0.270 -0.268 -0.186 -0.200 -0.268 -0.268 -0.168 -0.181 -0.227 -0.250 -0.125 -0.167
(0.167) (0.166) (0.156) (0.155) (0.171) (0.170) (0.158) (0.157) (0.178) (0.178) (0.160) (0.157)
LOGPPE 0.005 0.008* 0.006* 0.009** 0.002 0.004 0.005 0.007* -0.000 0.004 0.003 0.007*
(0.004) (0.004) (0.003) (0.004) (0.004) (0.004) (0.003) (0.004) (0.004) (0.004) (0.003) (0.004)
ROE 0.002*** 0.002*** 0.002*** 0.003*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002*** 0.002***
(0.001) (0.001) (0.001) (0.001) (0.000) (0.001) (0.001) (0.001) (0.000) (0.001) (0.000) (0.001)
VOLAT -0.415 -0.413 -0.328 -0.329 -0.434 -0.425 -0.333 -0.333 -0.426 -0.420 -0.328 -0.330
(0.349) (0.348) (0.300) (0.300) (0.346) (0.344) (0.299) (0.298) (0.349) (0.347) (0.299) (0.300)
Yr fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Industry fixed effects No Yes No Yes No Yes No Yes No Yes No Yes
Observations 61,751 61,608 60,940 60,800 61,765 61,610 60,954 60,802 61,805 61,654 60,994 60,846
R-squared 0.248 0.248 0.260 0.259 0.250 0.249 0.261 0.260 0.250 0.248 0.262 0.260
70

Table A.5: Carbon Emissions and Stock Book-to-Market Ratios: Excluding LTG
The sample period is 2005-2018. The dependent variable is monthly LNBM. The main independent variables are carbon emission levels (Panel A) and
the growth in emissions (Panel B). All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors
(in parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. In columns (4)
through (6), we additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: LNBM (1) (2) (3) (4) (5) (6)
LOGS1TOT 0.028*** 0.049***
(0.004) (0.005)
LOGS2TOT 0.014** 0.042***
(0.005) (0.005)
LOGS3TOT 0.019** 0.049***
(0.006) (0.005)
MSCI -0.210*** -0.193*** -0.199*** -0.254*** -0.251*** -0.257***
(0.021) (0.021) (0.020) (0.021) (0.021) (0.021)
MOM -0.738*** -0.740*** -0.741*** -0.699*** -0.699*** -0.700***
(0.049) (0.050) (0.050) (0.042) (0.042) (0.042)
VOLAT 2.373*** 2.351*** 2.383*** 2.408*** 2.377*** 2.423***
(0.394) (0.393) (0.389) (0.301) (0.306) (0.303)
SALESGR -0.511*** -0.521*** -0.520*** -0.477*** -0.481*** -0.485***
(0.044) (0.044) (0.044) (0.037) (0.038) (0.038)
SALESGRt+12 -0.331*** -0.351*** -0.343*** -0.290*** -0.298*** -0.287***
(0.044) (0.045) (0.046) (0.038) (0.038) (0.038)
SALESGRt+24 -0.235*** -0.250*** -0.245*** -0.204*** -0.211*** -0.205***
(0.045) (0.042) (0.042) (0.031) (0.030) (0.030)
Observations 468,751 468,714 469,171 463,230 463,193 463,650
R-squared 0.294 0.288 0.288 0.418 0.415 0.415

DEP. VAR.: LNBM (1) (2) (3) (4) (5) (6)
S1CHG 0.033** 0.010
(0.011) (0.011)
S2CHG 0.031*** 0.011**
(0.006) (0.005)
S3CHG 0.067 0.033
(0.065) (0.041)
MSCI -0.173*** -0.173*** -0.173*** -0.189*** -0.189*** -0.189***
(0.019) (0.019) (0.019) (0.017) (0.017) (0.017)
MOM -0.738*** -0.738*** -0.738*** -0.696*** -0.696*** -0.696***
(0.051) (0.051) (0.051) (0.043) (0.043) (0.043)
VOLAT 2.329*** 2.338*** 2.332*** 2.235*** 2.241*** 2.236***
(0.394) (0.396) (0.396) (0.317) (0.317) (0.316)
SALESGR -0.555*** -0.557*** -0.591*** -0.494*** -0.497*** -0.517***
(0.051) (0.045) (0.057) (0.046) (0.041) (0.049)
SALESGRt+12 -0.365*** -0.365*** -0.364*** -0.331*** -0.331*** -0.330***
(0.044) (0.044) (0.045) (0.038) (0.039) (0.039)
SALESGRt+24 -0.263*** -0.263*** -0.262*** -0.239*** -0.239*** -0.239***
(0.041) (0.041) (0.041) (0.028) (0.028) (0.028)
Observations 468,823 468,702 469,171 463,302 463,181 463,650
R-squared 0.287 0.287 0.287 0.410 0.410 0.410
71

Table A.6: Carbon Emissions and Stock Returns: Backfilled Emissions
The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels of scope 1, scope 2, and
scope 3, filled backward using their 2018 values. All other variables are defined in Table 1 and Table 2. We report the results of the pooled regression
with standard errors (in parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed
effects. In columns (4) through (6), we additionally include industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)

LOGS1TOT 0.063*** 0.121***
(0.020) (0.016)
LOGS2TOT 0.169*** 0.209***
(0.032) (0.031)
LOGS3TOT 0.227*** 0.340***
(0.038) (0.045)
LOGSIZE -0.146*** -0.204*** -0.213*** -0.204*** -0.272*** -0.334***
(0.040) (0.045) (0.047) (0.043) (0.047) (0.057)
B/M 0.524** 0.520** 0.545** 0.616** 0.582** 0.563**
(0.218) (0.217) (0.217) (0.217) (0.210) (0.208)
LEVERAGE -0.444** -0.446** -0.300* -0.411** -0.457*** -0.419**
(0.178) (0.163) (0.152) (0.159) (0.145) (0.144)
MOM 1.014** 1.014** 1.007** 1.004** 1.009** 1.000**
(0.365) (0.367) (0.363) (0.368) (0.369) (0.365)
INVEST/A -1.034 -0.860 -0.257 -0.548 -0.261 0.420
(1.103) (1.148) (1.214) (1.071) (1.093) (1.109)
HHI 0.077 0.072 0.214* 0.112 0.090 0.190
(0.114) (0.113) (0.112) (0.122) (0.118) (0.122)
LOGPPE -0.030 -0.058** -0.094*** -0.014 -0.031 -0.072***
(0.017) (0.021) (0.023) (0.017) (0.019) (0.018)
ROE 0.013*** 0.012*** 0.011** 0.013*** 0.013*** 0.012***
(0.004) (0.004) (0.004) (0.004) (0.004) (0.004)
VOLAT 0.108 -0.085 -0.047 0.416 0.363 0.410
(3.549) (3.496) (3.530) (3.208) (3.183) (3.202)
Observations 746,499 746,642 747,139 736,711 736,854 737,351
R-squared 0.150 0.151 0.151 0.152 0.152 0.153
72

Table A.7: Carbon Emissions and Stock Returns: Interaction with Disclosure
The sample period is 2005-2018. The dependent variable is monthly RET. The main independent variables are carbon emission levels (Panel A) and the
growth in emissions (Panel B). DISCLOSURE is an indicator variable equal to one if firm emissions are directly disclosed by a company and equal to
zero if they are estimated by Trucost. All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors
(in parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. In columns (4)
through (6), we also include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
LOGS1TOT 0.034 0.070***

(0.022) (0.017)
LOGS2TOT 0.096*** 0.119***
(0.031) (0.028)
LOGS3TOT 0.110*** 0.161***
(0.032) (0.037)
LOGS1TOT*DISCLOSURE -0.038* -0.034**
(0.018) (0.015)
LOGS2TOT*DISCLOSURE -0.027 -0.036
(0.023) (0.026)
LOGS3TOT*DISCLOSURE -0.007 -0.006
(0.018) (0.018)
Observations 744,555 744,698 745,195 734,800 734,943 735,440
R-squared 0.150 0.150 0.150 0.151 0.151 0.151

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
S1CHG 0.490*** 0.506***

(0.099) (0.101)
S2CHG 0.309*** 0.315***
(0.081) (0.082)
S3CHG 1.229*** 1.249***
(0.281) (0.290)
S1CHG*DISCLOSURE -0.363*** -0.367***
(0.100) (0.104)
S2CHG*DISCLOSURE -0.344** -0.349***
(0.113) (0.108)
S3CHG*DISCLOSURE -0.556** -0.566**
(0.228) (0.234)
Observations 733,417 733,420 733,961 723,836 723,839 724,380
R-squared 0.151 0.151 0.152 0.153 0.153 0.153
73

Table A.8: Carbon Emissions and Stock Returns: Interaction with Foreign Operations
The sample period is 2005-2018. The dependent variable is monthly RET. The main independent variables are carbon emission levels (Panel A) and the
growth in emissions (Panel B). FORDUM is an indicator variable equal to one if a firm has any sales generated abroad and zero if all its sales are generated
domestically. All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double
clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects. In columns (4) through (6), we additionally
include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Levels
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
LOGS1TOT*FORDUM 0.004 0.002

(0.011) (0.009)
(0.020) (0.016)
(0.023) (0.019)
Observations 650,402 650,582 650,984 641,677 641,857 642,259
R-squared 0.148 0.148 0.148 0.150 0.150 0.150

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6)
S1CHG *FORDUM -0.067 -0.053

(0.101) (0.099)
S2CHG *FORDUM 0.051 0.065
(0.062) (0.066)
S3CHG *FORDUM 0.293* 0.330**
(0.135) (0.142)
Firm fixed effects No No No No No No
Observations 641,126 641,188 641,636 632,551 632,613 633,061
R-squared 0.150 0.149 0.150 0.151 0.151 0.152
74

Table A.9: Carbon Emissions and Stock Returns: Economic Development
The sample period is 2005-2018. The dependent variable is monthly RET. The main independent variables are carbon emission levels (columns 1-4) and the growth in emissions
(columns 5-8). All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and
year level. Panel A reports the results for a sample of firms coming from G-20 and non-G20 countries. Panel B reports the results for a sample of firms from OECD and non-OECD
countries. All regression models include the controls of Table 6 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we additionally
include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: G20
Developed (G20) (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT 0.030 0.068***
(0.026) (0.015)
LOGS3TOT 0.120*** 0.174***
(0.034) (0.035)
S1CHG 0.446*** 0.469***
(0.091) (0.092)
S3CHG 1.084*** 1.114***
(0.300) (0.312)
Observations 575,747 576,221 567,596 568,070 567,030 567,434 559,029 559,433
R-squared 0.151 0.151 0.153 0.153 0.152 0.153 0.154 0.154
Developing (non-G20) (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT 0.027** 0.058**
(0.012) (0.022)
LOGS3TOT 0.101*** 0.161***
(0.030) (0.048)
S1CHG 0.384*** 0.373***
(0.100) (0.099)
S3CHG 1.267*** 1.276***
(0.232) (0.236)
Observations 170,784 170,952 169,147 169,315 170,808 170,952 169,171 169,315
R-squared 0.163 0.163 0.166 0.166 0.164 0.165 0.166 0.167
Panel B: OECD
Developed (OECD) (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT 0.035 0.049***
(0.022) (0.013)
LOGS3TOT 0.117*** 0.136***
(0.027) (0.028)
S1CHG 0.395*** 0.422***
(0.088) (0.091)
S3CHG 0.985*** 1.017***
(0.309) (0.326)
Observations 524,785 525,401 516,957 517,573 517,312 517,832 509,628 510,148
R-squared 0.158 0.159 0.160 0.161 0.160 0.160 0.162 0.162
Developing (non-OECD) (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT 0.010 0.083***
(0.024) (0.024)
LOGS3TOT 0.102* 0.218***
(0.049) (0.069)
S1CHG 0.469*** 0.470***
(0.112) (0.109)
S3CHG 1.323*** 1.307***
(0.280) (0.276)
Observations 221,714 221,738 219,754 219,778 218,047 218,071 216,117 216,141
R-squared 0.174 0.175 0.176 0.177 0.176 0.177 0.178 0.179
75

Table A.10: Carbon Emissions and Stock Returns: Physical Risk
The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (columns 1-4) and the growth in emissions
(columns 5-8). All variables are defined in Table 1 and Table 2. We report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm
and year level. Climate Risk Index (CRI) measures the extent to which countries and regions have been affected by impacts of weather-related loss events (storms, floods,
heatwaves etc.). All regression models include the controls of Table 6 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we
additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
CRI -0.012 -0.002 0.003 -0.033 -0.285 -0.306 -0.319 -0.339

(0.484) (0.708) (0.499) (0.726) (0.383) (0.386) (0.389) (0.391)
LOGS1TOT 0.040 0.077***
(0.026) (0.020)
LOGS3TOT 0.127*** 0.177***
(0.036) (0.041)
S1CHG 0.349** 0.366**
(0.132) (0.131)
S3CHG 0.918** 0.942**
(0.385) (0.384)
CRI*LOGS1TOT -0.024 -0.029
(0.022) (0.022)
CRI*LOGS3TOT -0.023 -0.022
(0.038) (0.038)
CRI*S1CHG 0.194 0.194
(0.159) (0.155)
CRI*S3CHG 0.518 0.513
(0.320) (0.306)
Observations 728,245 728,874 718,690 719,319 717,450 717,994 708,065 708,609
R-squared 0.147 0.147 0.149 0.149 0.149 0.149 0.150 0.150
Table A.11: Carbon Total Firm Emissions and Stock Returns: Pre/Post Paris (Economic Development)
The dependent variable is RET. The main independent variable is carbon emission level. All variables are defined in Table 1 and Table 2. We report the results of
the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. Columns (1)-(4) consider a sample of firms located in
developed (G-20) countries, columns 5-8 consider a sample from developing (non-G20) countries. Panel A reports the results for a sample covering the period
January 2014-November 2015 (two years before Paris COP 21 conference). Panel B reports the results for a sample covering the period January 2016-December
2017 (two years after Paris COP 21 conference). All regression models include the controls of Table 6 (unreported for brevity), year-month fixed effects, and country
fixed effects. In selected columns, we additionally include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
Panel A: Pre Paris
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
Developed Countries (G-20) Developing Countries
LOGS1TOT -0.051* 0.004 0.006 -0.007
(0.028) (0.022) (0.034) (0.035)
LOGS3TOT -0.025 0.058 0.054 0.059
(0.042) (0.051) (0.055) (0.096)
Observations 83,542 83,691 82,520 82,669 25,812 25,847 25,583 25,618
R-squared 0.095 0.095 0.104 0.104 0.091 0.091 0.103 0.103
Panel B: Post Paris

DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
Developed Countries (G-20) Developing Countries
LOGS1TOT 0.109*** 0.097*** 0.053* 0.087**
(0.034) (0.025) (0.029) (0.036)
LOGS3TOT 0.212*** 0.244*** 0.185*** 0.285***
(0.043) (0.045) (0.053) (0.067)
Observations 148,033 148,118 145,843 145,928 44,606 44,653 44,166 44,213
R-squared 0.051 0.051 0.056 0.057 0.050 0.051 0.062 0.062
76

Table A.12: Carbon Emissions and Stock Returns: Policy Change and Reputational Risk
The sample excludes companies in the oil & gas (gic=2), utilities (gic=65-69), and motor (gic=18, 19, 23) industries. The dependent variable is monthly RET. The main independent
variables are carbon emission levels (columns 1-4) and the growth in emissions (columns 5-8). All variables are defined in Table 1 and Table 2. We report the results of the pooled
regression with standard errors (in parentheses) double clustered at the firm and year level. Paris is an indicator variable equal to zero for the period January 2014-November 2015
(two years before Paris COP 21 conference) and equal to one for the period January 2016-December 2017 (two years after Paris COP 21 conference). All regression models include
the controls of Table 6 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we additionally include Trucost industry-fixed effects.
***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT -0.042 -0.026
(0.034) (0.035)
LOGS3TOT 0.012 0.083
(0.053) (0.056)
S1CHG 0.683*** 0.679***
(0.165) (0.162)
S3CHG 2.058*** 2.082***
(0.304) (0.312)
Paris*LOGS1TOT 0.156*** 0.160***
(0.051) (0.053)
Paris*LOGS3TOT 0.144** 0.148**
(0.059) (0.060)
Paris*S1CHG -0.244 -0.255
(0.224) (0.218)
Paris*S3CHG -0.752 -0.846
(0.518) (0.531)
Observations 272,376 272,692 268,554 268,870 266,194 266,505 262,469 262,780
R-squared 0.060 0.060 0.063 0.063 0.061 0.062 0.064 0.064
Table A.13: Carbon Emissions and Stock Returns: Policy Change and Legacy Sample
The sample period is 2005-2018. The sample are all firms that have presence in the sample any year prior to 2016. The dependent variable is RET. The main independent
variables are carbon emission levels (columns (1)-(4)) and the growth in emissions (columns (5)-(8)). All variables are defined in Table 1 and Table 2. We report the results of
the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. All regressions include year-month fixed effects and country fixed effects.
All regression models include the controls of Table 7 (unreported for brevity). Paris is an indicator variable equal to zero for the period January 2014-November 2015 (two
years before Paris COP 21 conference) and equal to one for the period January 2016-December 2017 (two years after Paris COP 21 conference). In even-numbered columns,
we also include Trucost industry-fixed effects. ***1% significance; **5% significance; *10% significance.
DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8)
LOGS1TOT -0.053* -0.037
(0.029) (0.029)
LOGS3TOT 0.045 0.082
(0.046) (0.049)
S1CHG 0.657*** 0.667***
(0.161) (0.160)
S3CHG 1.869*** 1.893***
(0.354) (0.361)
Paris*LOGS1TOT 0.141*** 0.143***
(0.050) (0.050)
Paris*LOGS3TOT 0.114* 0.113*
(0.058) (0.059)
Paris*S1CHG -0.403* -0.392*
(0.216) (0.216)
Paris*S3CHG -1.405** -1.522**
(0.601) (0.630)
Observations 234,514 234,830 231,781 232,097 233,546 233,857 230,818 231,129
R-squared 0.076 0.076 0.079 0.079 0.076 0.076 0.079 0.080
77

Table A.14: Carbon Total Firm Emissions and Stock Returns: Awareness (Regional)
Our sample firms include alternately Asia, Europe, and North America. The dependent variable is DOMPOLICY. DOMPOLICY measures the strictness
of a country’s domestic climate policy in a given year. INTPOLICY, lagged one year, measures the strictness of a country’s international climate policy
in a given year. We report the results of the pooled regression with standard errors (in parentheses) double clustered at the firm and year level. Paris is
an indicator variable equal to zero for a sample covering the period January 2014-November 2015 (two years before Paris COP 21 conference), and
equal to one for a sample covering the period January 2016-December 2017 (two years after Paris COP 21 conference). All regression models include
country fixed effects. ***1% significance; **5% significance; *10% significance.
(Asia) (Europe) (North America)
VARIABLES DOMPOLICY
INTPOLICY 0.228*** 0.315*** 0.916***
(0.043) (0.043) (0.116)
Paris -0.135*** 0.005 0.367***
(0.013) (0.020) (0.034)
Paris*INTPOLICY 0.288*** 0.020 -0.820***
(0.023) (0.034) (0.088)
Constant 0.462*** 0.355*** 0.195***
(0.019) (0.031) (0.025)
Country fixed effects Yes Yes Yes
Observations 184,557 127,853 146,080
R-squared 0.839 0.469 0.651
78

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Global Pricing of Carbon-Transition Risk

Patrick Bolton§ and Marcin Kacperczykφ

Journal of Finance forthcoming

JEL codes G12, G23, G30, D62

§ Columbia University, Imperial College, CEPR, and NBER

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related Financial Disclosure (TCFD).

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II. Data and Sample

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A. Data on Corporate Carbon Emissions

a similarity score of one based on the standardized company names.

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we do not include this data in our study.

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A. Pricing Carbon-Transition Risk throughout the World

A.1. Empirical Specification

10 These roughly correspond to a three-digit SIC classification.

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"#$!,# = &$ + &% ($)$ #*+,,+-.,)!,#&% + &' 0-.12-3,!,#&% + µ# + e!,# (1)

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"#$!,# = &$ + &% D($-1&3 #*+,,+-.,)!,#&% + &' 0-.12-3,!,#&% + µ# + e!,# (2)

A.2. Evidence from the United States and China

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A.3. Unconditional Results

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tail of the empirical distribution.

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A.4. Book-to-Market Ratios

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4567!,# = &$ + &% ($)$ #*+,,+-.,)!,# + &' 0-.12-3,!,#&% + µ# + e!,# (3)

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A.5. Information Observability and Carbon Premium

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A.6. Geographic Distribution

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A.7. Economic Development

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B. Carbon-Transition Risk Drivers

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B.1. Technological Mix

oil & gas industry.

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B.2. Socio-political Environment

GDPPC -106.966 -107.168 -102.286 -102.108