The impact of carbon risk on stock returns: evidence from the European electric utilities. (2nd January 2021)

• Record Type: Journal Article
• Authors: Bernardini, Enrico; Di Giampaolo, Johnny; Faiella, Ivan; Poli, Riccardo
• Is Part Of: Journal of sustainable finance & investment. Volume 11:Number 1(2021)
• Page Start: 1
• Page End: 26
• Publication Date: 2021-01-02
• Subjects: Carbon risk -- climate change -- factor models; C58 -- G11 -- Q54; Social responsibility of business -- Periodicals; Sustainable development -- Finance -- Periodicals; 332
• DOI: 10.1080/20430795.2019.1569445
• Languages: English
• ISSNs: 2043-0795

Abstract

ABSTRACT: The decarbonization process has made obsolete the traditional value-creation model of companies operating in the electricity sector, particularly affecting those with a greater share of fossil fuels in their energy mix that have been forced to write down their carbon-intensive activities with a negative impact on operating income, equity and leverage. Institutional investors have a significant exposure to equity and debt of European Electric Utilities: if the transition process towards a low-carbon system is faster than expected, the risk that these weaknesses may spread across the financial system shouldn't be underestimated. Analyses based on risk-premium factor models show that there was a significant low-carbon premium during the years in which the decarbonization process accelerated; in the period considered, an investment strategy that focused more on low-carbon companies would have delivered higher returns without modifying the overall risk profile.