Yes. Stocks of US firms with higher total CO2 emissions (and higher emission growth) earn higher returns — a carbon premium — after controlling for size, book-to-market, momentum, and other known predictors, and it cannot be explained by unexpected profitability. The premium is driven by the level and year-on-year change of total emissions, not by emission intensity (emissions per unit of sales). The pattern is consistent with investors already demanding compensation for carbon-transition risk. Institutional investors implement exclusionary screening, but only on direct (Scope 1) emission intensity and only in a few salient industries.
What anomaly it documents
Predictor: firm-level carbon emissions — Scope 1 (direct), Scope 2 (purchased energy), Scope 3 (supply chain), measured both as level and as annual change.
Direction:positive — higher (and faster-rising) total emissions → higher subsequent returns (the carbon premium).
Key distinction:intensity (emissions/sales) carries no significant return effect; the premium attaches to total emissions, suggesting a size/scale-of-exposure risk rather than an efficiency signal.
OSAP predictor: not in the Chen–Zimmermann Open Source Asset Pricing set (recent climate-finance variable).
How it is measured
Trucost (EDX) corporate carbon-emissions data: ~1,000 US listed firms from fiscal 2005, expanding to ~2,900 from fiscal 2016. Matched to FactSet returns and balance-sheet data; sample 2005–2017.
Cross-sectional (Fama–MacBeth-style) monthly return regressions on the level and change of Scope 1/2/3 emissions, controlling for size, B/M, momentum, leverage, investment/assets, PP&E, etc.
Separately examine institutional-ownership tilts versus emission levels and intensities.
Evidence
A one-standard-deviation increase in the level / change of Scope 1 emissions raises monthly returns by 15 bps / 26 bps (≈1.8% / 3.1% annualized).
Scope 3: 33 bps / 31 bps per month (≈4.0% / 3.8% annualized) — all for level / change respectively.
Emission intensity has no significant effect on returns — a robust, notable result.
Institutions are significantly underweight firms with high Scope 1 emission intensity, but only in salient industries (e.g., energy, utilities, motor); this divestment does not significantly move returns.
Why it might work
Transition-risk compensation: higher-emission firms are more exposed to future carbon regulation/taxation and stranded-asset risk in a decarbonizing world, so investors require a premium.
Onset of exclusionary screening: early divestment by some institutions can depress prices of high-emission names today and lift their expected returns.
Limitations and risks
Short, recent sample (2005–2017) over a period of rising climate salience; the carbon premium may be partly an unexpected-news effect and need not persist (cf. Pástor–Stambaugh–Taylor: realized green outperformance can come from rising climate concern, not expected returns).
Emissions data are partly estimated/imputed and inconsistently disclosed, especially Scope 3.
Coverage skews to larger firms; results may not extend to small caps or non-US markets uniformly.
Key references
Bolton, P. & Kacperczyk, M. (2021) — Do Investors Care About Carbon Risk? — Journal of Financial Economics
Hong, H. & Kacperczyk, M. (2009) — The Price of Sin — Journal of Financial Economics
Pástor, Ľ., Stambaugh, R. & Taylor, L. (2022) — Dissecting Green Returns — Journal of Financial Economics
Provenance: verified/generated from the paper's full text.
