Measuring the impact of carbon transition risk on the equity performance of energy corporations

Abstract

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This paper examines the financial impact of carbon transition risk on energy sector returns by constructing a green-minus-polluter (GMP) portfolio concentrating on the oil and gas (brown) corporations and utilities (green) across North America and Europe. A structural break in 2020 prompts a split analysis. Between 2014 and 2020, North American GMP portfolios show strong abnormal returns (9–10%), which turn negative in the 2021–2023 period. In Europe, zero-emission portfolios yield 6% abnormal returns initially but show no significant profitability afterward. These findings suggest a faster transition pace in North America and indicate that while green investing can help mitigate transition risk, its financial performance varies over time. Our findings also show that the GMP factor has stronger explanatory power in the North American market and among oil and gas companies, highlighting regional and sectoral differences. The study contributes to the ongoing debate on the benefits of aligning investments with the green energy transition.