Carbon beta measures a stock’s sensitivity to climate transition risk using a pollutive-minus-clean factor. It measures climate exposure, aligns with forward looking risk indicators, and shows that high-carbon-beta firms underperform when climate shocks occur.
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Abstract
We introduce carbon beta, a measure of climate transition risk determined by a stock’s return sensitivity to a pollutive-minus-clean portfolio. Carbon beta is higher for smaller and more leveraged firms, firms with more investments and fixed assets, as well as firms with lower R&D. Carbon betas correlate with green patent issuance and other forward-looking measures of climate risk. We study the interaction of carbon beta with shocks to climate risk to judge its hedging ability: Returns to stocks with high carbon betas are lower during months with climate risk realizations.