Polluters are Short-Lived: Climate Risk and the Timing of Cash Flows

Apr 29, 2023
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Abstract: I construct a measure of cash flow duration at the firm level and link it to carbon emissions of the same firm. Firms that generate their cash flows in the near term emit more carbon, reflecting that short-term cash flows are relatively less exposed to regulatory climate risks. This relationship leads to high correlations of emission and duration premiums. Return differences are driven by emissions instead of duration and disappear after controlling for changes in investors’ climate concerns. These changes, together with the novel link between duration and emissions, provide an intuitive empirical explanation for the recent underperformance of value.

Median total carbon emissions (blue solid line), intensity of carbon emissions (red dashed line), and carbon emission footprint (grey solid-dashed line) per median duration of portfolio deciles ranked on annual cash flow duration. Portfolios are rebalanced every calendar year _i_ based on the realization of the sorting variable of the fiscal year ending in the same year.
Median total carbon emissions (blue solid line), intensity of carbon emissions (red dashed line), and carbon emission footprint (grey solid-dashed line) per median duration of portfolio deciles ranked on annual cash flow duration. Portfolios are rebalanced every calendar year i based on the realization of the sorting variable of the fiscal year ending in the same year.
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