Climate Alpha with Predictors also Improving Firm Efficiency

Abstract

Characteristics of companies associated with climate change predict excess equity returns. We show that firms with lower carbon emission intensities—with carbon emissions being a key component of the Paris Accord—have high excess returns. We present evidence that firms with lower carbon emissions have higher productivity, and that the lower carbon intensities may reflect greater firm efficiencies. A portfolio of firms with a higher proportion of LEED certified buildings also exhibits high excess returns. Such companies also contemporaneously exhibit higher return on assets. Portfolios constructed with the carbon emission intensities and the LEED certified buildings signals are only weakly correlated to a traditional quality factor. We discuss how climate change themed measures of firm efficiency may drive value for sustainably focused investors.