Greenhouse gas emissions intensity and the cost of capital

The transition from high- to low-carbon energy sources differentially impacts financial assets. Low-carbon assets may benefit from lower costs of capital through a reduction in perceived risk as well as increased investor preference for such assets relative to high-carbon assets. This paper investigates whether firms’ greenhouse gas (GHG) emissions intensity affects their cost of equity. Using an international sample of 1,920 publicly listed firms over the years 2002-2016, we find that industry-adjusted GHG emissions intensity positively and significantly impacts the cost of equity. For every unit increase in GHG emissions intensity, we find that the cost of equity increases by 15 basis points. This suggests that firm-level emissions-reduction efforts enhance firm value through a reduction in the cost of capital.