Emission premium in the European stock market

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School of Business | Master's thesis
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Increasing concerns regarding climate change affect the risk profiles of assets, consequently impacting asset pricing through various channels. This thesis emphasizes the transition risk arising from the shift to low-carbon economy away from fossil fuels. While the timeline and pace of regulations regarding the use of fossil fuels remain uncertain, the trend is evident: reliance on fossil fuels poses a significant risk for a company in the future. Hence, we aim to study whether investors price this risk in the European stock market. Prior research examines primarily the US market and thus, our academic contribution is to understand emission pricing in Europe, with a specific emphasis on the Nordics. Our study involves cross-sectional regressions for the total amount of GHGs, GHG intensity and emission yearly growth rate. Our sample period is from 2015 to 2022 and consists of 1354 public companies in Europe. Emission data is obtained from Compustat Trucost database and company demographics from Refinitiv. Our main findings show that there is GHG emission premium of 7.4% in total emissions. For scope 1 premium is 5.9% and for scope 3, 7.8%. Annualised premium associated to emission intensity is 4.61%. By dividing our data into sub-groups of the Nordics and other countries, we find that emission premium in the European market is largely driven by the Nordic countries. Findings also show that the premium is a recent phenomenon since GHG emissions are only priced after the year 2018. These results implicate that investors in the European stock market demand green assets and require compensation for the risks associated to the emission levels of the investment. Our results are driven by increased regulation and change in sustainability preferences. The Nordics drive the transition with the ambitious environmental policies, increased pressure on sustainability and financing of green technologies.
Thesis advisor
Suominen, Matti
emission premium, GHG emissions, transition risk, green transition
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