Climate transition risk, profitability and stock prices

We investigate whether climate transition risk is reflected in the financial performance and cross-section pricing of publicly-traded European and US firms. Using a firm-level carbon risk score (CRS) that assesses the vulnerability of a firm's value to transition to a low-carbon economy, we find that firms with the lowest transition risk exposures perform better financially, and that European firms are more sensitive to transition risks than US firms. We also find that stocks with low exposure to transition risk offer greater returns to investors, consistent with the fact that stock prices of firms do not adequately reflect underlying climate transition risk. Relative financial performance of less vulnerable firms and underreaction effects to transition risk decreased after COP21.

Automated summary

This study investigates the impact of climate transition risk on the financial performance and cross-section pricing of publicly-traded European and US firms. The findings reveal that firms with lower transition risk exposures demonstrate better financial performance, and European firms exhibit higher sensitivity to transition risks compared to US firms. Additionally, stocks with low exposure to transition risk offer higher returns to investors, indicating that stock prices do not accurately reflect climate transition risk. The relative financial performance of less vulnerable firms and underreaction to transition risk decreased after COP21.