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Are carbon emissions associated with stock market returns? | blog post


Various stakeholders, including the US government, investors and the media, are showing considerable interest in how US companies disclose – and eventually reduce – their carbon emissions. Investors also want to know whether these cuts by portfolio companies can contribute to better stock returns and better operating performance.

In response to such demand from policymakers and practitioners, an emerging body of influential papers has revealed that there are strong links between carbon emissions and fundamental measures of corporate financial performance, such as stock market returns. , operating profitability and enterprise value.[1]

However, the results – and their interpretations – presented in these articles are highly dependent on measurement choices, some made by academic study authors and some by data providers.

In our study, we highlight two potential problems:

(i) Using data on total emissions rather than emissions intensity (the emissions-to-revenue ratio) as the primary measure of carbon risk; and

(ii) The quality of the carbon emissions figures estimated by the suppliers.

Total Emissions vs Emissions Intensity

Although total emissions can be a good measure of economy-wide carbon risk, it is not an appropriate choice of measure for understanding individual companies » carbon risk; using a company’s emissions intensity (the ratio of emissions to revenue) is a better way to measure this.

Carbon emissions come from a company’s core operations. Therefore, the total emissions mainly indicate the amount of raw materials it used or the number of goods it produced and sold (see Figure 1), which can also be seen in Figure 2, where we plot company-level carbon emissions (Scope 1 plus Scope 2) against sales and cost of goods sold (COGS).[2]

Chart showing companies' carbon emissions versus their sales and cost of goods sold

On a stand-alone basis, any correlation between total emissions and stock market returns – the subject of most previous academic work – can only be interpreted as showing a link between a firm’s productivity or earnings (an approximation of the quantity of units produced and sold), and its stock market performance.

Conversely, studying emissions intensity — a metric more commonly used by investors, which calculates the emissions-to-revenue ratio — better reflects a company’s emissions performance by avoiding automatic correlations with company size.

Using a company’s total emissions rather than its emissions intensity to measure carbon risk is like using net income rather than ratio-based measures, such as return on assets, to measure financial performance.

While it’s important to recognize the relationship between emissions and revenue, we also need to recognize that significant emitters are concentrated in a few sectors, such as materials, energy and utilities. Therefore, the association between emissions and stock yields needs to be investigated by properly adjusting for sectoral differences in emissions.

The quality of carbon emissions estimated by suppliers

Our study raises concerns about the reliability of emissions data estimated by sellers. We show that the emissions figures estimated by the sellers systematically differ from those disclosed directly by the companies. This is even more concerning when we know that most observations in standard emissions databases are estimated by providers.[3]

Therefore, any type of statistical relationship between carbon emissions and stock market returns based on this data only captures the differences in distribution between disclosed and estimated emissions.

Consistent with this argument, we show that the correlation between stock returns and total emissions data documented in previous research is determined entirely by the emissions estimated by the suppliers, as opposed to the actual emissions figures provided by the companies.

We show that by focusing specifically on firms real levels of carbon emissions, there is no link between emissions and stock market performance (i.e. there does not appear to be a carbon risk premium).

What do our findings reveal about emissions and financial performance?

To test whether carbon emissions are actually associated with stock market returns and financial performance, we used data from a sample of 2,729 US companies from 2005 to 2019. We obtained emissions information from Trucost, which we merged with CRSP and Compustat for information on stock returns and company characteristics.

Once we:

(i) the programs examined intensity rather than total company emissions; and

(ii) taken into account the emissions estimated by the supplier compared to the actual emissions disclosed by the company,

we found no evidence of a relationship between Scope 1, 2 or 3 issues and fundamental stock or financial performance.

Our results suggest that responsible investors, policymakers, and academics may want to be cautious in interpreting correlations between a company’s carbon emissions and valuation constructs (e.g., stock returns) or data. fundamental accounting (operating profitability).

We take no position on whether or not disclosure and/or reduction of emissions is desirable. We are only arguing that calculating emissions intensity (emissions per revenue) is a more appropriate way to capture a company’s carbon risk and that, based on this metric, there is no correlation between carbon emissions and stock returns (i.e. there is no evidence of a carbon premium yet).

Nevertheless, we warn that increasing carbon pricing may affect this dynamic. Researchers and practitioners should also be cautious in using vendor-estimated emissions figures which can fundamentally alter inferences about the link between emissions and financial performance.

However, we believe that companies disclosing their shows widely, along with greater truth in advertising from show-related data providers, will alleviate this latter problem.

This article was presented during PRI Academic Network Week 2022.


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[1] Bolton, P. and Kacperczyk, M. (2021a). “Do investors care about carbon risk? » Journal of Financial Economics 142(2), 517-549.

Bolton, P. and Kacperczyk, M. (2021b). “Global Carbon Transition Risk Pricing.” Working Paper, available at:

Matsumura, EM, Prakash. R., and Vera-Muñoz, SC (2014). “Firm Value Effects of Carbon Emissions and Carbon Disclosures.” The Accounting Journal 89(2), 695-724.

In, SY, Park, KY & Monk, A. (2019). “Is ‘Being Green’ rewarded in the marketplace? An empirical investigation of decarbonization and stock market returns. Stanford Global Project Center Working Paper, available at:

Garvey GT, Iyer, M. & Nash, J. (2018). “Carbon footprint and productivity: Does the ‘E’ in ESG reflect efficiency as well as the environment? »Journal of Investment Management 16(1), 59-69.

[2] Emissions data is typically reported under the Greenhouse Gas (GHG) Protocol and is measured in tonnes of carbon dioxide per year. The GHG Protocol specifies three emission perimeters. Scope 1 reflects direct emissions sources owned or controlled by a company. Scope 2 emissions reflect the consumption of purchased electricity, steam or other energy sources. Scope 3 encompasses all other emissions associated with a company’s operations that are not directly owned or controlled by the company.

[3] Nonetheless, we believe that greater disclosure of emissions by companies and the convergence of vendor methodologies for estimating undisclosed emissions will mitigate these issues.

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