TRANSITION RISK PREMIUM
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Date
2024-12-12
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Publisher
Nazarbayev University Graduate School of Business
Abstract
This study explores the relationship between climate exposure measures and the cross-section of emerging market companies' returns. It focuses on 1,370 companies from 24 emerging market countries, including Kazakhstan. By merging two unique datasets from Refinitiv Eikon on corporate fundamentals and Sautner et al. (2023) on exposure measures, constructed from earnings call transcripts, for the 2002-2023-year period, the study uncovers a meaningful discovery: the higher the overall exposure measure which incorporates opportunities, regulatory frameworks, sentiment, and physical measures related to climate change, the higher the returns, even when controlling for the size, book-to-market, and other return determinants. This finding suggests a significant transition risk premium. This premium, distinct from carbon risk premium, reflects investors’ trust, reward, and compensation for firms that actively strive to mitigate climate risks and innovate to meet sustainability standards. It is interesting to note that opportunity and physical exposure measures related to climate change have zero effect on stock returns, indicating their uncertain, long-term, and localized nature. Importantly, these findings serve as evidence for the growth potential of emerging market countries considering the challenges of transitioning to a low-carbon economy. This research is important because it posits the significance of incorporating climate risk management into financial plans to assure investor confidence and sustainable growth.
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Keywords
transition risk, climate change, stock returns, climate exposures, Type of access: Embargo
Citation
Rustemova, T. (2024). Transition Risk Premium. Nazarbayev University Graduate School of Business.