Is carbon transition risk priced by equity markets?

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Here’s a note by Alex Edmans about three papers:

Whether carbon transition risk is priced by equity markets is a first-order question that matters not only for finance, but the fight against global warming. The Review of Finance is publishing three papers reaching different conclusions on this question.

Are Carbon Emissions Associated With Stock Returns?”, by Jitendra Aswani, Aneesh Raghunandan, and Shiva Rajgopal (“ARR”), argues that the relationship between carbon emissions and stock returns, documented by the influential Bolton and Kacperczyk (JFE 2021) paper, is no longer significant when focusing on only disclosed rather than estimated emissions, or when scaling carbon emissions by firm size.

Given the RF paper reached different conclusions to an earlier published paper, we gave the authors of that original paper the right to comment. “

“Are Carbon Emissions Associated With Stock Returns? Comment” by Patrick Bolton and Marcin Kacperczyk is the authors’ comment. It argues, for example, that unscaled emissions are the relevant measure.

Are Carbon Emissions Associated With Stock Returns? Reply” is ARR’s reply to the comment.

I thank all five authors for their willingness to participate in open, intellectual debate, which is where academia works at its best. Rarely is a single paper the last word on an issue; by publishing different perspectives, we hope that readers become more informed than if they were to see only one, and allow them to draw their own conclusions.

(Editor’s note: While Marcin is the current Managing Editor of the RF, the ARR paper was handled entirely by me during my tenure as Managing Editor and Marcin had no influence on my decision. As is standard, the Comment and Reply are published as is without any editor or referee input.).