are carbon emissions associated with stock returns

Quick answer

The question "are carbon emissions associated with stock returns" asks whether firm-level carbon emissions help predict or are correlated with equity returns. As of 2026-01-17, multiple papers and debates show that evidence depends strongly on measurement choices (total vs intensity), data sources (vendor estimates vs firm disclosures), and econometric controls. This article reviews the literature, explains why results vary, and describes implications for investors, asset managers, and policymakers.

Why this question matters

Investors and policymakers ask "are carbon emissions associated with stock returns" because if emissions systematically relate to returns, then:

• Carbon-related risks may be priced in markets (affecting cost of capital).
• Portfolio tilts, exclusions or active engagements could alter expected returns and risk exposures.
• Corporate incentives to reduce emissions could change if markets reward or penalize high emitters.

Answering whether carbon emissions associated with stock returns requires careful attention to what is measured, how returns are defined, and which markets or time periods are studied.

Background and motivation

The research question "are carbon emissions associated with stock returns" sits at the intersection of environmental policy, corporate finance, and asset pricing. Two broad mechanisms motivate the question:

• Risk-based pricing: Future carbon prices, regulation, or costs from transition could raise firms' future cash‑flow volatility and required returns, potentially creating a carbon risk premium.
• Taste-based or preference effects: Some investors may shun "brown" firms, lowering their prices and raising expected returns for those stocks without a direct risk channel.

Both channels can generate correlations between emissions and realized returns, but they imply different policy and investment responses.

Key empirical findings

Early findings reporting a carbon premium

Several studies documented that firms with higher reported or estimated emissions delivered higher average realized returns, consistent with a "carbon premium". Early work often used unscaled (total) emissions measures from data vendors and found robust cross-sectional correlations with subsequent returns after simple controls.

These initial results motivated interest from asset managers and regulators: if carbon emissions predict returns, then climate exposures could be treated like other risk factors.

Re-examination and critiques (Aswani, Raghunandan, Rajgopal, 2024)

As of 2026-01-17, per the Review of Finance article by Aswani, Raghunandan, and Rajgopal (2024), the claim that are carbon emissions associated with stock returns is substantially qualified by measurement choices. Their main findings:

• The positive association is strongest when using vendor-estimated total (unscaled) emissions.
• When emissions are scaled for firm size (emissions intensity, e.g., CO2 per revenue or per asset) or when using firm-disclosed emissions, the association largely disappears.
• Vendor estimates often correlate with firm size and other fundamentals; failing to adjust for these confounds yields spurious associations.

Their critique intensified debate by showing how sensitive the result is to straightforward data and scaling choices.

Evidence across markets and specifications

Other work paints a more nuanced picture:

• Studies focused on emissions pricing under the EU Emissions Trading System (ETS) (e.g., Oestreich & Tsiakas, 2015) document channels where carbon allowance prices and allocation policies affect firm cash flows and stock returns in Europe. These results emphasize local policy context.
• International evidence (e.g., Chen et al., 2024) examines CO2 exposure across countries and finds heterogeneous results, depending on market structure and policy regimes.

Overall, the literature suggests that whether carbon emissions associated with stock returns depends on market, measurement, and identification strategies.

Measurement: definitions and data sources

Understanding the phrase "are carbon emissions associated with stock returns" requires clarity on emissions measures and data provenance.

Emissions concepts: Scope 1, Scope 2, Scope 3

• Scope 1: Direct emissions from company-owned or controlled sources (most often used in firm-level analyses).
• Scope 2: Indirect emissions from purchased energy (e.g., electricity).
• Scope 3: All other indirect emissions in a company’s value chain (often largest but hardest to measure).

Different papers use different scopes. Scope 1 is common for asset-pricing studies because it is conceptually closer to a firm’s direct operational footprint and (in some jurisdictions) is more consistently reported.

Total (unscaled) emissions vs emissions intensity

• Total emissions (e.g., metric tons CO2e) measure absolute output of greenhouse gases. They are strongly correlated with firm size (assets, revenue, market cap).
• Emissions intensity (e.g., tons CO2e per million dollars of revenue) normalizes emissions by a size or activity metric and is intended to capture carbon efficiency.

As noted above, the core result from recent critiques is that unscaled total emissions can mechanically proxy for firm size. Therefore, studies that do not scale emissions may confuse size effects with carbon-related return patterns.

Vendor-estimated vs firm-disclosed emissions

• Data vendors (e.g., well-known providers in ESG datasets) often fill gaps with models to estimate emissions for firms that don’t disclose or to harmonize methods. These estimates can use sector averages, revenue shares, or input‑output models.
• Firm-disclosed emissions (self-reported via sustainability reports or CDP) may be more accurate for reporting firms but are subject to reporting biases and gaps.

Aswani et al. show that vendor-estimated unscaled emissions can be correlated with financial fundamentals in ways that produce apparent premiums that vanish with disclosure-based or intensity measures.

Theoretical channels linking emissions to returns

When asking "are carbon emissions associated with stock returns", consider three main economic channels:

Transition risk and regulatory pricing

Potential regulatory actions (carbon taxes, stricter standards) or market-driven shifts to low-carbon inputs can raise future costs for high-emission firms, increasing risk premia demanded by investors. If investors price expected regulatory costs into required returns, emissions and returns can be associated through a risk channel.

Taste-based / investor shunning explanations

If certain investors avoid "brown" firms for ethical or mandate reasons, demand for those stocks could fall, lowering prices and increasing expected returns without an underlying risk increase. This is a preference-based channel.

Cash-flow effects and allocation of carbon allowances

Where carbon markets exist (like the EU ETS), the allocation of allowances (free vs auctioned) and the pass-through of allowance costs to product prices can directly affect profitability and thus realized returns for exposed firms. Empirical work in the EU finds such cash-flow links in certain settings.

Methodological issues and econometric considerations

Careful empirical design is essential when addressing "are carbon emissions associated with stock returns".

Scaling and size confounds

Total emissions correlate with firm size. Without appropriate scaling (intensity) or controls for size, liquidity, and industry, studies risk attributing size-related return patterns to emissions.

Measurement error and endogeneity

Vendor estimates may contain systematic errors correlated with financial variables. Emissions may also be endogenous: corporate investment, growth, or mergers can change emissions and returns simultaneously. Instrumental variables or natural experiments can help but are hard to find.

Choice of return metric (realized vs expected returns)

Most studies test whether emissions predict realized returns. Realized returns can reflect both changes in expected returns and changes in cash flows (i.e., performance). To isolate a true risk premium (price of risk), researchers may analyze expected-return proxies, required returns implied by accounting, or cross-sectional factor pricing tests.

Academic debate and responses

Proponents of a priced carbon risk

Earlier work and some prominent papers argued that a carbon risk premium exists, motivating investors to incorporate climate exposure into factor models. These studies often used vendor data and found significant cross-sectional effects.

Aswani et al.’s critique and ensuing literature

As of 2026-01-17, per the Review of Finance publication and related SSRN preprints, Aswani, Raghunandan, and Rajgopal provided a detailed re-examination showing that the carbon premium claims weaken after correcting for scaling and data-source biases. Their SSRN discussion and subsequent comment-reply exchanges (including responses from researchers who find priced carbon risk under certain specifications) illustrate an active methodological debate.

Synthesis: where evidence stands

Current consensus is not settled. Many findings that suggest are carbon emissions associated with stock returns are sensitive to (a) whether emissions are scaled, (b) the data source (vendor estimate versus firm disclosure), and (c) regional policy context. Results are more robust in settings with explicit carbon pricing mechanisms that affect cash flows (e.g., EU ETS), less robust when using global vendor estimates without intensity scaling.

Evidence beyond U.S. equities

Research using the EU ETS (e.g., Oestreich & Tsiakas, 2015) finds that allowance prices and the structure of allocation can produce return effects for regulated firms, especially where allowances are auctioned or costs are passed through. International studies (e.g., Chen et al., 2024) show heterogeneity: some countries and periods reveal carbon-return links, others do not. This suggests local policy and market structure matter.

Robustness checks and empirical strategies

Researchers use several approaches to separate risk-pricing from spurious correlations when testing whether carbon emissions associated with stock returns:

• Use intensity measures (emissions per revenue or per asset) rather than unscaled totals.
• Compare vendor estimates with firm disclosures and analyze both sets separately.
• Include comprehensive controls for firm size, book-to-market, profitability, investment, and industry fixed effects.
• Conduct event studies around policy announcements (carbon tax proposals, ETS reform) to isolate exogenous shocks.
• Instrument emissions with exogenous measures (e.g., geography-based energy mix) where feasible.
• Analyze earnings surprises and cash-flow channels to see if returns reflect future performance rather than changes in required returns.

Practical implications for investors and asset managers

If you are evaluating whether carbon emissions associated with stock returns should inform strategy, consider:

• Data choice matters: prefer firm-disclosed Scope 1/2 and intensity measures for portfolio-level decisions. Where firm disclosure is incomplete, understand vendor methodologies before relying on estimated totals.
• Factor construction: an allocation using unscaled emissions risks conflating size with carbon exposure. Build signals using intensity and remove size/lower-level confounds.
• Active vs passive responses: simple exclusions (screening out high emitters) can change portfolio risk characteristics; engagement and transition-themed allocations may better align alignment with long-term reduction goals.

For executing climate-aware strategies, Bitget offers trading and custody infrastructure and Bitget Wallet for secure asset management (when interacting with tokenized or carbon-related financial products). Use platform analytics to monitor exposures but ensure underlying data quality before making allocation changes.

Note: This overview is informational and not investment advice.

Implications for corporate disclosure and policy

The literature shows the value of standardized, high-quality corporate carbon disclosure. Key policy takeaways:

• Standardized disclosure (consistent scopes and units) reduces measurement error and helps investors evaluate whether are carbon emissions associated with stock returns.
• Carbon pricing mechanisms that create clear cash‑flow consequences for emissions (e.g., taxes, auctioned permits) make pricing channels easier to identify and create stronger incentives for corporate mitigation.
• Regulators and standard setters can improve data comparability, enabling more robust asset-pricing research and better-informed capital allocation.

Example: EU ETS and cash-flow linkages

Empirical studies of the EU ETS show that when firms face explicit allowance costs, the link between emissions and returns is more likely to reflect a cash-flow channel. Allocation rules (free versus auctioned allowances) and the pass-through of compliance costs to product prices determine magnitude and direction. These region-specific institutional details explain why are carbon emissions associated with stock returns in some contexts but not others.

Data sources and common datasets

Researchers commonly use:

• Vendor ESG/CO2 datasets (vendor-estimated totals and gaps filled by models).
• CDP (Carbon Disclosure Project) and firm sustainability reports (firm-disclosed numbers).
• Regulatory datasets for emissions and allowance prices (e.g., EU ETS market data).
• Standard financial datasets for returns and firm characteristics (market cap, revenues, book values).

As a rule, compare multiple sources and test sensitivity to scaling and reporting scope.

Open questions and directions for future research

Important unresolved issues include:

• Causal identification: Are observed associations driven by priced risk, investor preferences, or omitted fundamentals?
• Scope 3 measurement: How should researchers incorporate large, hard-to-measure value‑chain emissions into asset-pricing tests?
• Dynamic policy effects: How do expectations about future carbon policy alter current returns and corporate investment?
• Investor composition: What is the role of green vs brown investor bases and institutional mandates in creating price impacts?

Addressing these questions requires better disclosure, richer natural experiments, and continued cross-country comparisons.

How to evaluate new studies claiming that are carbon emissions associated with stock returns

When reading new research or fund marketing:

• Check if emissions are scaled for firm size (intensity) and which scope is used.
• Examine whether vendor estimates or firm disclosures underpin results.
• Look for robustness checks: industry fixed effects, controls for size and liquidity, and alternative return measures.
• Prefer studies that identify exogenous policy shocks or use credible instruments to address endogeneity.

Quick checklist for practitioners

• Use intensity measures for carbon-efficiency signals.
• Verify data provenance and vendor methodology before relying on unscaled emissions.
• Control for size and related fundamentals when constructing carbon factors.
• Consider regional policy contexts that affect cash flows (carbon pricing systems).
• Use engagement and transition strategies alongside portfolio tilts; avoid assuming a universal carbon premium.

Reporting context and timeliness

• As of 2026-01-17, per the Review of Finance publication by Aswani, Raghunandan, and Rajgopal (2024), the apparent carbon premium weakens when using intensity measures and disclosed emission data.
• As of 2026-01-17, prior international studies (e.g., Chen et al., Journal of Empirical Finance, 2024) find mixed evidence across countries, highlighting the role of local market structures.
• As of 2026-01-17, empirical work on the EU ETS (e.g., Oestreich & Tsiakas, 2015) supports a cash-flow channel where emissions pricing affects returns for regulated firms.

These time-stamped references show the debate’s recent developments and why up-to-date disclosure and regulatory changes can shift empirical conclusions about whether carbon emissions associated with stock returns.

Final notes and practical next steps

If you want to explore climate exposure in portfolios, start with high-quality disclosures and intensity metrics, run sensitivity tests that include size and profitability controls, and use event studies around policy changes to seek causal evidence. For trading and custody needs related to climate-aware strategies or tokenized carbon instruments, consider Bitget services and secure custody via Bitget Wallet.

Further reading includes the Review of Finance re‑examination, SSRN preprints of the debate, EU ETS empirical papers, and practitioner summaries from research centers and investor networks.

Continue to monitor academic updates and disclosure improvements to answer — with greater confidence — the question: are carbon emissions associated with stock returns?