The impact of carbon risk on stock returns: evidence from the European electric utilities

ABSTRACTThe decarbonization process has made obsolete the traditional value-creation model of companies operating in the electricity sector, particularly affecting those with a greater share of fossil fuels in their energy mix that have been forced to write down their carbon-intensive activities with a negative impact on operating income, equity and leverage. Institutional investors have a significant exposure to equity and debt of European Electric Utilities: if the transition process towards a low-carbon system is faster than expected, the risk that these weaknesses may spread across the financial system shouldn’t be underestimated. Analyses based on risk-premium factor models show that there was a significant low-carbon premium during the years in which the decarbonization process accelerated; in the period considered, an investment strategy that focused more on low-carbon companies would have delivered higher returns without modifying the overall risk profile.