The Pollution Premium

Li, Kai; Hsu, Po–Hsuan; Tsou, Chi-Yang

doi:10.2139/ssrn.3578215

Cited by 55 publications

(48 citation statements)

References 84 publications

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“…For example, Bansal, Ochoa, and Kiku (2017) study the welfare implications of rising temperature and propose a temperature-augmented long-run risks model that accounts for the interaction between temperature, economic growth and risk. Bolton and Kacperczyk (2019) and Hsu, Li and Tsou (2019) highlight the importance of carbon risks and environmental pollution in the cross-section of stock returns. Growing evidence indicates that climate risks may be priced in financial markets (Hong, Li, and Xu 2019;Daniel, Litterman, and Wagner 2019;Kumar, Xin, and Zhang 2019).…”

mentioning

confidence: 99%

Stranded Fossil Fuel Reserves and Firm Value

Atanasova

Schwartz

2019

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Do capital markets reflect the possibility that fossil fuel reserves may become "stranded assets" in the transition to a low carbon economy? We examine the relation between oil firms' value and their proved reserves. Using a sample of 600 North American oil firms for the period 1999 to 2018, we document that while reserves are an important component of oil firm value, the growth of these reserves has a negative effect on firm value. This negative effect on value is stronger for oil producers with higher extraction costs. When we decompose total reserves into developed and undeveloped reserves, we show that the negative effect of reserves growth on value is due to firms growing their undeveloped oil reserves. Unlike developed, undeveloped reserves require major capital expenditures and longer time before they can be extracted. We also document that the negative effect is stronger for undeveloped oil reserves located in countries with strict climate policies. Our evidence is consistent with markets penalizing future investment in undeveloped reserves growth due to climate policy risk. High level of institutional ownership, stock market liquidity and analyst coverage do not change the negative effect of undeveloped reserves growth on firm value.

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confidence: 99%

Stranded Fossil Fuel Reserves and Firm Value

Atanasova

Schwartz

2019

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“…For example, Hsu, Li, and Tsou (2020) document a pollution premium and Bolton and Kacperczyk (2021) find a carbon premium. 12.…”

Section: Notesmentioning

confidence: 99%

Does excluding sin stocks cost performance?

Blitz¹,

Swinkels

2021

Journal of Sustainable Finance & Investment

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We examine the impact of excluding sin stocks on expected portfolio risk and return. Exclusions involve risk relative to the market and peers. We show how this tracking error can be translated into an equivalent loss in expected return, which is negligible at low tracking error levels, but not at higher levels. However, even modest ex ante tracking error levels may lead to sizable compoundedunderperformance ex post. Taking an asset pricing perspective we find that popular exclusions typically go against rewarded factors such as value, profitability, and low risk, which is harmful for expected portfolio returns. Theoretically sin itself may also be a priced factor, but this is not yet supported by the empirical evidence. Tracking error may be minimized and expected portfolio return restored by filling the gap left by excluding sin stocks with non-sin stocks that offer the best hedging properties and similar or better factor exposures.

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“…Recent studies focus on a risk premium for holding emissions-intensive stocks. Hsu, Li, and Tsou [19] attribute the existence of a pollution premium to environmental policy uncertainty. Bolton and Kacperczyk [7] find a carbon premium that is related to the level of and to changes in carbon emissions.…”

Section: Introductionmentioning

confidence: 99%

Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond

Jacob

Nerlinger

2021

Sustainability

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We use the COVID-19 pandemic period in 2020 as an exogenous shock event to assess in how far climate risks measured by carbon exposure have entered and established themselves in the valuation of global stocks. In addition to descriptive analyses, we conduct cross-sectional panel regressions to assess the influence of carbon intensity levels on return and risk characteristics during and after the shock period. Furthermore, a difference-in-differences model setup allows us to infer whether these influences were significantly different when comparing pre-shock, shock, and post-shock periods. We find that carbon intensity affected returns significantly and negatively during a time of high uncertainty. In fact, high-emitting stocks suffered significantly more compared to the pre-crisis period. However, they could make up for their additional losses in the recovery period. In line with their high-risk exposure towards stranded assets and climate policy uncertainty, carbon-intensive stocks face higher risk levels in more stable economic times, thus justifying a carbon premium.

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The Pollution Premium

Cited by 55 publications

References 84 publications

Stranded Fossil Fuel Reserves and Firm Value

Stranded Fossil Fuel Reserves and Firm Value

Does excluding sin stocks cost performance?

Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond

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