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Foundations of Climate Investing: How Equity Markets Have Priced Climate Transition Risks

Did companies’ climate transition risk profiles affect performance? The growing strength of Low Carbon Transition (LCT) Scores provides support for this thesis (after controlling for GEMLT factors).

 

Cumulative Returns of the LCT Score

 

Data from Oct. 31, 2013, to Jan. 31, 2021.

 

The improved value of LCT Scores provides support that during the study period climate-transition risk had been a price driver, after controlling for traditional equity style factors. However, price impact was mainly concentrated in the most exposed LCT Categories, while there was little stock price impact in the large neutral category.


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