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An influential emerging literature documents strong correlations between carbon emissions and stock returns. We re-examine those data and conclude that these associations are driven by two factors. First, stock returns are correlated only with unscaled emissions estimated by the data vendor, but not with unscaled emissions actually disclosed by firms. Vendor-estimated emissions systematically differ from firm-disclosed emissions and are highly correlated with financial fundamentals, suggesting that prior findings primarily capture the association between such fundamentals and returns. Second, unscaled emissions, the variable typically used in academic literature, is correlated with stock returns but emissions intensity (emissions scaled by firm size), an equally important measure used in practice, is not. While unscaled emissions represent an important metric for society, we argue that, for individual firms, emissions intensity is an appropriate measurement choice to assess carbon performance. The associations between emissions and returns disappear after accounting for either of the issues above. [ABSTRACT FROM AUTHOR]

This document is a response to a critique of a paper on the relationship between carbon emissions and stock returns. The authors thank the editor and critics for their engagement in the conversation. The response addresses the critics' main points, including the appropriate measure of carbon risk, the correlation between emissions and stock returns, and the influence of firm fundamentals on emissions. The authors provide counterarguments and discuss the sensitivity of the results to different specifications. The study highlights the potential challenges and limitations of controlling for size in the analysis of emissions and stock returns. [Extracted from the article]

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds (as identified by Morningstar) in the United States from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores. We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms' compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders. [ABSTRACT FROM AUTHOR]