Abstract
Characteristics of companies associated with climate change predict excess equity returns. This article shows that companies with low-carbon-emission intensities—with carbon emissions being a key component of the Paris Agreement—have high excess returns. The authors present evidence that companies with low carbon emissions have high productivity and that low carbon intensities may reflect greater company efficiencies. A portfolio of companies with a high proportion of Leadership in Energy and Environmental Design (LEED)-certified buildings also exhibits high excess returns. Such companies also contemporaneously exhibit high return on assets. Portfolios constructed with carbon emission intensity and LEED-certified building signals are only weakly correlated with a traditional quality factor. The authors further discuss how climate change–themed measures of company efficiency may drive value for sustainably focused investors.
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