Periodic Reporting for period 4 - FinanceCC (Investors and Climate Change)
Berichtszeitraum: 2025-01-01 bis 2025-06-30
The general theme of the research project is the climate change implications for finance.
How do investors, the financial system, and corporations respond to the climate crisis?
What have they done, what could they do, to combat climate change? How do their actions complement or substitute government and civil society actions? These themes had barely emerged as an academic research topic when this ERC project was approved. Climate Finance has now grown into a major subfield of finance.
My first research article in this area “Hedging Climate Risk” published in 2016 in the Financial Analysts Journal (FAJ) has framed the problem of climate change as a risk management problem for investors and proposed low carbon market indexes as a way for passive investors to hedge carbon transition risk.
At the time I submitted my proposal very little was known about how investors are pricing carbon transition risk and about how companies are aligning their future operations with net zero commitments and nationally determined contributions. My research with Marcin Kacperczyk on stock returns and corporate carbon emissions of US listed companies published in the Journal of Financial Economics in 2021 under the title “Do Investors Care about Carbon Risk?” provides a first concrete assessment of how financial value is linked to carbon emissions. Our finding that investors increasingly demand compensation for their exposure to carbon transition risk has revealed that US listed companies are facing material financial penalties for their carbon emissions. What we later named “The Financial Cost of Carbon” in our 2022 article in the Journal of Applied Corporate Finance (written with Zachary Halem).
Investors and financial markets are beginning to reflect the future decarbonization costs companies face in stock prices. Thus, financial markets are playing a part in bringing about the transition to clean energy. This is a novel perspective which had not been highlighted by economists before. Indeed, most of the economic analysis was focused on public policy, carbon taxation and cap & trade systems. Having pointed to the role of finance in the carbon transition, one goal of this research has been to determine how widespread this pricing of corporate carbon emissions is, what are its determinants, and its effects on corporate behaviour, in particular changes in future carbon emissions.
How do investors, the financial system, and corporations respond to the climate crisis?
What have they done, what could they do, to combat climate change? How do their actions complement or substitute government and civil society actions? These themes had barely emerged as an academic research topic when this ERC project was approved. Climate Finance has now grown into a major subfield of finance.
My first research article in this area “Hedging Climate Risk” published in 2016 in the Financial Analysts Journal (FAJ) has framed the problem of climate change as a risk management problem for investors and proposed low carbon market indexes as a way for passive investors to hedge carbon transition risk.
At the time I submitted my proposal very little was known about how investors are pricing carbon transition risk and about how companies are aligning their future operations with net zero commitments and nationally determined contributions. My research with Marcin Kacperczyk on stock returns and corporate carbon emissions of US listed companies published in the Journal of Financial Economics in 2021 under the title “Do Investors Care about Carbon Risk?” provides a first concrete assessment of how financial value is linked to carbon emissions. Our finding that investors increasingly demand compensation for their exposure to carbon transition risk has revealed that US listed companies are facing material financial penalties for their carbon emissions. What we later named “The Financial Cost of Carbon” in our 2022 article in the Journal of Applied Corporate Finance (written with Zachary Halem).
Investors and financial markets are beginning to reflect the future decarbonization costs companies face in stock prices. Thus, financial markets are playing a part in bringing about the transition to clean energy. This is a novel perspective which had not been highlighted by economists before. Indeed, most of the economic analysis was focused on public policy, carbon taxation and cap & trade systems. Having pointed to the role of finance in the carbon transition, one goal of this research has been to determine how widespread this pricing of corporate carbon emissions is, what are its determinants, and its effects on corporate behaviour, in particular changes in future carbon emissions.
Published articles based on the work performed over the period of this ERC project include:
1. “Investor Ideology” with Tao Li, Enrichetta Ravina, and Howard Rosenthal, Journal of Financial Economics, 2020
2. “Do Investors Care about Carbon Risk?” with Marcin Kacperczyk, Journal of Financial Economics, 2021
3. “Mandatory Corporate Carbon Disclosures and the Path to Net Zero” Management and Business Review, 2021
4. “Net-Zero Carbon Portfolio Alignment” with Marcin Kacperczyk and Frédéric Samama Financial Analysts Journal, 2022
5. “The Financial Cost of Carbon,” with Zachery Halem and Marcin Kacperczyk Journal of Applied Corporate Finance, 2022
6. “Global Pricing of Carbon-Transition Risk,” with Marcin Kacperczyk, Journal of Finance, 2023
7. “Behind schedule: The corporate effort to fulfill climate obligations,” with Joe Aldy, Marcin Kacperczyk, and Zach Halem, Journal of Applied Corporate Finance, 2023
8. “Do carbon prices affect stock prices?” with Adrian Lam and Mirabelle Muûls, Journal of Financial Research 2025
9. “Why coalitions of wealthy nations should fund others to decarbonize,” with Ottmar Edenhofer, Alissa Kleinnijenhuis, Jonah Rockström, and Jeromin Zettelmeyer, Nature 2025
10. “Show & Tell: An Analysis of Corporate Climate Messaging and Its Financial Impacts,” with Joe Aldy, Zachary Halem, and Marcin Kacperczyk, Financial Analysts Journal 2025
11. “Firm commitments,” with Marcin Kacperczyk, Management Science, 2025
Besides these publications I have also written six working papers and contributed to five reports:
The six working papers are:
1. “Stability and Evolution in Investor Ideology”, with Enrichetta Ravina, Howard Rosenthal, and Chris Tausanovitch (2022)
2. “Carbon Disclosure and the Cost of Capital,” with Marcin Kacperczyk (2021, revised 2025)
3. “The great carbon arbitrage”, with Tobias Adrian and Alissa Kleinnijenhuis (2022, revised 2025)
4. “The CO2 Question: Technical Progress and the Climate Crisis”, with Marcin Kacperczyk and Moritz Wiedemann (2023, under revision 2025)
5. “Inflation and the Carbon Premium,” with Marcin Kacperczyk and Tianyu Wang (2024, under revision 2025)
6. “Carbon Home Bias,” with Marc Eskildsen and Marcin Kacperczyk (2024, under revision 2025)
The five reports are:
1. “The Green Swan,” with Morgan Després, Luiz Awazu Pereira da Silva, Frédéric Samama, and Romain Svartzman (2020)
2. “Resilience of the Financial System to Natural Disasters,” with Marcin Kacperczyk, Harrison Hong, and Xavier Vives (2021)
3. “Climate and Debt,” with Lee Buchheit, Mitu Gulati, Ugo Panizza, Beatrice Weder di Mauro, and Jeromin Zettelmeyer (2022)
4. “Digital Circular Economy for Net Zero,” with Peter Lacy, Michael Spence, Ming Xu, Long Chen, Sangwoo Choi, Wei Liu, Qi Sun, and Bo Tang (2022)
5. “Paris Report 3: Global Action Without Global Governance: Building coalitions for climate transition and nature restoration,” Jean Pisani-Ferry, Beatrice Weder di Mauro, and Jeromin Zettelmeyer (eds.) (2025)
1. “Investor Ideology” with Tao Li, Enrichetta Ravina, and Howard Rosenthal, Journal of Financial Economics, 2020
2. “Do Investors Care about Carbon Risk?” with Marcin Kacperczyk, Journal of Financial Economics, 2021
3. “Mandatory Corporate Carbon Disclosures and the Path to Net Zero” Management and Business Review, 2021
4. “Net-Zero Carbon Portfolio Alignment” with Marcin Kacperczyk and Frédéric Samama Financial Analysts Journal, 2022
5. “The Financial Cost of Carbon,” with Zachery Halem and Marcin Kacperczyk Journal of Applied Corporate Finance, 2022
6. “Global Pricing of Carbon-Transition Risk,” with Marcin Kacperczyk, Journal of Finance, 2023
7. “Behind schedule: The corporate effort to fulfill climate obligations,” with Joe Aldy, Marcin Kacperczyk, and Zach Halem, Journal of Applied Corporate Finance, 2023
8. “Do carbon prices affect stock prices?” with Adrian Lam and Mirabelle Muûls, Journal of Financial Research 2025
9. “Why coalitions of wealthy nations should fund others to decarbonize,” with Ottmar Edenhofer, Alissa Kleinnijenhuis, Jonah Rockström, and Jeromin Zettelmeyer, Nature 2025
10. “Show & Tell: An Analysis of Corporate Climate Messaging and Its Financial Impacts,” with Joe Aldy, Zachary Halem, and Marcin Kacperczyk, Financial Analysts Journal 2025
11. “Firm commitments,” with Marcin Kacperczyk, Management Science, 2025
Besides these publications I have also written six working papers and contributed to five reports:
The six working papers are:
1. “Stability and Evolution in Investor Ideology”, with Enrichetta Ravina, Howard Rosenthal, and Chris Tausanovitch (2022)
2. “Carbon Disclosure and the Cost of Capital,” with Marcin Kacperczyk (2021, revised 2025)
3. “The great carbon arbitrage”, with Tobias Adrian and Alissa Kleinnijenhuis (2022, revised 2025)
4. “The CO2 Question: Technical Progress and the Climate Crisis”, with Marcin Kacperczyk and Moritz Wiedemann (2023, under revision 2025)
5. “Inflation and the Carbon Premium,” with Marcin Kacperczyk and Tianyu Wang (2024, under revision 2025)
6. “Carbon Home Bias,” with Marc Eskildsen and Marcin Kacperczyk (2024, under revision 2025)
The five reports are:
1. “The Green Swan,” with Morgan Després, Luiz Awazu Pereira da Silva, Frédéric Samama, and Romain Svartzman (2020)
2. “Resilience of the Financial System to Natural Disasters,” with Marcin Kacperczyk, Harrison Hong, and Xavier Vives (2021)
3. “Climate and Debt,” with Lee Buchheit, Mitu Gulati, Ugo Panizza, Beatrice Weder di Mauro, and Jeromin Zettelmeyer (2022)
4. “Digital Circular Economy for Net Zero,” with Peter Lacy, Michael Spence, Ming Xu, Long Chen, Sangwoo Choi, Wei Liu, Qi Sun, and Bo Tang (2022)
5. “Paris Report 3: Global Action Without Global Governance: Building coalitions for climate transition and nature restoration,” Jean Pisani-Ferry, Beatrice Weder di Mauro, and Jeromin Zettelmeyer (eds.) (2025)
The main finding of this research is that there is a valuation discount worldwide for listed companies with high carbon emissions, other things equal. The higher are carbon emissions (direct or indirect) the higher the expected return, or equivalently the lower the company’s market to book (or price-earnings) ratio. This is true across all sectors in Europe, North America, and Asia. Moreover, this valuation discount is stronger in recent years.
A second key finding is that companies that choose to disclose their carbon emissions are perceived to be safer companies (there is less uncertainty around their carbon emissions) and therefore have a lower valuation discount, other things equal. This finding has been influential in guiding public policy on carbon emissions disclosure by listed companies.
A third major finding is that the EU ETS carbon allowance prices have reached a level in the second part of Phase 3 such that they have significant material effects on the financial performance and carbon emission reductions of the listed companies that are subject to this regulation.
A fourth main finding is that the companies that have committed to decarbonization are more likely to be the best in class, the ones with the lowest carbon emissions to begin with. Even though thousands of listed companies have made pledges to decarbonize their operations, there has been no reduction in aggregate corporate carbon emissions.
A fifth key finding is that green innovation, although it has been steadily on the rise, has had no significant impact in reducing carbon emissions, whether in the short or medium term. The main likely explanation is rebound effects: even though carbon efficiency is improved through green technical progress, the increase in sales of innovating firms cancels out the benefits of greater carbon efficiency.
A second key finding is that companies that choose to disclose their carbon emissions are perceived to be safer companies (there is less uncertainty around their carbon emissions) and therefore have a lower valuation discount, other things equal. This finding has been influential in guiding public policy on carbon emissions disclosure by listed companies.
A third major finding is that the EU ETS carbon allowance prices have reached a level in the second part of Phase 3 such that they have significant material effects on the financial performance and carbon emission reductions of the listed companies that are subject to this regulation.
A fourth main finding is that the companies that have committed to decarbonization are more likely to be the best in class, the ones with the lowest carbon emissions to begin with. Even though thousands of listed companies have made pledges to decarbonize their operations, there has been no reduction in aggregate corporate carbon emissions.
A fifth key finding is that green innovation, although it has been steadily on the rise, has had no significant impact in reducing carbon emissions, whether in the short or medium term. The main likely explanation is rebound effects: even though carbon efficiency is improved through green technical progress, the increase in sales of innovating firms cancels out the benefits of greater carbon efficiency.