Do Carbon Emissions Move Stock Prices?
Banks and academics think so—but how strong is the effect, really?
My cofounders and I have always been drawn to the less obvious connections. We’re not against trends—in fact, we’re riding the hypewave around AI agents with full force—but some subjects just seem so chewed through by many others that it seems impossible to add value by chiming in on the discussion.
This “it’s too chewed through”-phenomenon had us with carbon. Our analyses have contained carbon data, but it was never the focal point of investigation. We always try to think about things in a holistic, systems-thinking type of way. In that vein, zeroing in on carbon just like everybody else seemed a bit counterintuitive.
So we looked at the less obvious relationships within our datasets. Last week we talked about a possible link between groundwater and profit margins—barely anybody speaks about that. We’ve also looked at the proportion of women and how that affects profits. What interests us most is odd, unpolished threads that most analysts overlook.
That being said, we’re ready to switch it up a little bit. We’ve advanced so much in our technological prowess around causal inference and AI agents that we’re ready to get our teeth into some of those chewed-and-stewed subjects.
We realized that, for all the noise, talk, and seriously valuable research on carbon emissions (and carbon policies, taxes, etc.), it seems that nobody has nailed down a causal link between carbon emissions and stock prices.
We’re not fully there yet—Wangari is a startup and everything is under construction—but we’re ready to throw our technical prowess at this problem now. And if it works out in our favor, we can grow this further to make it a client study (projects starting from mid-August), part of our software platform offering (under construction, proof-of-concept ready), or an academic paper (currently exploring academic partnerships).
Today, let’s look at what’s already out there around carbon. Then we’ll know where we can add our secret sauce and what we should steer clear from.
Everyone Thinks Carbon Should Move Markets
Walk into any investment committee meeting and you’ll hear the same refrain: “Climate risk is investment risk.”
It’s true, and people are working really hard to address this. I’m not going to pretend that we’re any smarter than them, because indeed what they do is very sophisticated: Banks run carbon-risk stress tests. Asset managers insist carbon-heavy companies will face rising costs. Credit agencies tweak ratings based on emissions data .
It makes so much sense. More carbon emissions today should mean future carbon taxes, compliance costs, or shrinking market share. And yet the markets are not going in the right direction; why is it that “green” companies are not enjoying better valuations?
Or do they already, and we’re just failing to identify what’s truly green and what isn’t?
Academic Clues: A Carbon Premium… or Just Noise?
Economists Patrick Bolton and Marcin Kacperczyk published a landmark paper in 2021: Their key finding was that U.S. firms with higher carbon emissions earned higher stock returns over time .
This “carbon premium” sounded counterintuitive but plausible: investors saw carbon as risky and demanded hazard pay to hold dirty stocks. If true, carbon was priced in—but perversely, being dirty rewarded shareholders.
Then came the skeptics. Jitendra Aswani and colleagues revisited the data and pointed out big issues:
Early studies used raw tonnage of emissions instead of carbon intensity (emissions per revenue), skewing results.
Many relied on estimated emissions instead of actual disclosures .
When they fixed these problems, the carbon premium disappeared. Their 2024 study showed no relationship between a firm’s carbon emissions (Scope 1, 2, or 3) and its stock returns or profitability .
Their conclusion: investors shouldn’t overinterpret weak correlations. The data doesn’t support a carbon risk premium—not yet.
Market Behavior: Shrugs and Short-Term Jitters
Does this mean investors don’t care at all? Not exactly.
There’s evidence that short-term market sentiment swings on climate news. One study found that when unexpected climate fears spike (after alarming headlines or policy shocks), “green” firms get a quick boost while “brown” firms take a hit .
But zoom out, and these blips fade into market noise. Oil stocks can rally on energy price surges. Solar stocks can crash over supply issues. The carbon signal, if it’s there, is drowned out by everything else.
Rabobank’s Surprise: No Carbon Penalty in Europe
Analysts at Rabobank expected European investors to penalize carbon-inefficient companies. Between 2008 and 2019, they looked for evidence that stock prices reflected carbon risk.
They found… nothing. No carbon premium. No systematic pricing of emissions. Investors weren’t consistently rewarding clean firms or punishing polluters .
This isn’t an isolated finding. Many large-scale academic reviews echo the same theme: higher carbon footprints don’t predict lower stock returns. Even strong climate pledges don’t move markets.
A 2024 study checked companies joining the Science-Based Targets initiative (SBTi)—firms publicly committing to CO₂ reductions. If markets truly priced carbon leadership, their stocks should have jumped.
The result? “Little evidence that SBTi membership increases stock prices” . The market reaction was basically a shrug.
The Missing Causal Link
Here’s the uncomfortable truth:
Banks and asset managers build complex carbon-risk models.
Academics publish paper after paper.
Corporate boards make bold climate pledges.
Yet almost no one has proven a direct, causal link between a company’s carbon footprint and its market valuation. I found a single study that seems to have found a causal link between 2018 and 2019—but that’s only two years of data, and the findings only hold up for Scope 1 emissions.
So, it might simply be that the market hasn’t priced in carbon costs yet. Or that other factors—energy cycles, tech trends, macro shocks—wash out any carbon signal.
As one research column noted, if markets aren’t fully pricing climate risks, relying on market forces alone to drive decarbonization is wishful thinking.
Why We’re Talking Carbon Now
For a firm that lives and breathes sustainability, it’s ironic how little we’ve talked about carbon. We chased more hidden sustainability-finance links while others fought over the carbon spotlight.
But we’ve come to realize that carbon is still too important to ignore—not because the evidence is strong, but because the evidence is weak.
That’s a gap worth closing.
Traditional analysis is good at finding correlations. What we really need now is causal proof: does cutting CO₂ actually cause stock prices to rise? Does emitting more cause them to fall?
On Friday, we’ll share our own case study:
A major global steel producer, ArcelorMittal (you might recall them from last week’s posts)
Over a decade of emissions and stock price data
Modern causal inference techniques
If there’s truly a causal link—if cutting carbon directly boosts market value—we’ll show it. If not, we’ll have hard data to back that up too. It’s just a single case study, but if it goes in the right direction, this might result in a bigger project for us.
Carbon might be mainstream, but the answers are not. It might be time to change that.
Wangari’s Curated Reads
Here’s a much-needed piece challenging the rising wave of climate “doomerism”—the belief that it’s already too late to act on climate change. Lloyd Alter argues that while the world faces grim prospects, embracing despair leads to the same inaction as outright denial. Drawing from his book The Story of Upfront Carbon, he highlights that meaningful choices—from avoiding carbon “lock-in” to systemic lifestyle and policy changes—can still steer us away from the worst outcomes, but only if we fight like hell and act now.
India’s attempt to curb sulfur emissions from coal power plants has hit a wall. After nearly a decade of missed deadlines and costly retrofitting plans, the government has decided to exempt many plants from installing pollution-control technology, prioritizing grid stability and affordability over stricter environmental standards. This piece by Zerodha explains why policy enforcement failed, what it means for India’s clean energy transition, and how lessons from China could offer a smarter path forward.
China is rapidly scaling up its clean energy capacity, with wind and solar installations projected to soar 35% in 2025 alone—potentially reducing fossil fuel power generation by two-thirds by 2030. Roger Boyd’s analysis highlights how China’s dominance in renewable manufacturing, battery technology, and electric vehicles could make it the world’s leading low-carbon economy, even as Western nations stall.