A1351
Title: Asset pricing of defining carbon emission targets
Authors: Andreas Stephan - Linnaeus University (Sweden) [presenting]
Maziar Sahamkhadam - Jonkoping University (Sweden)
Hans Loof - Royal Institute of Technology (Sweden)
Petter Dahlstrom - KTH Royal Institute of Technology (Sweden)
Abstract: The purpose is to provide evidence that public commitments to reduced carbon emission targets are reflected in stock returns. Utilizing a sample of 6,884 international stocks from 57 countries, including 1,065 firms committed to the Science Based Targets initiative (SBTi), it is shown that at the firm level, such commitments increase the annualized returns by 2.38\%, while setting carbon reduction targets leads to an increase of 3.16\%. These results remain significant even after controlling for firm characteristics related to carbon emissions. While these firm-level carbon target premiums are significant in developed markets, only the commitment premium is significant in emerging markets. Regarding market-based premiums, from January 2018 to July 2024, long-short portfolios based on SBTi commitments and target-setting generate annualized returns of 7\% and 8.17\%, respectively. The classical Fama-French risk factors are also demonstrated to not explain these systematic premiums. Applying the Fama-MacBeth cross-sectional regressions, results indicate that the price of carbon target risk is negative.
