Carbon Performance, Climate Governance, and Equity Risk

ABSTRACT This paper examines the relationship between carbon performance, climate governance, and equity risk. Using a sample of companies listed in the S&P500 index for the period 2009–2023, our results show that better carbon performance reduces equity risk, indicating that proactive carbon management reduces uncertainty and is beneficial to firms. Likewise, companies that embrace climate governance practices benefit from lower equity risk, thus providing incentives towards incorporating climate change issues at board level. While both factors individually contribute to lower equity risk, specifically total and unsystematic risk, their combined benefit is less than the sum of the individual effects, suggesting that firms may benefit from focusing on one factor when the other is already well developed. This evidence, built on solid measures and a comprehensive analysis, provides recommendations to companies and policymakers towards enhancing carbon policies and strengthening climate governance commitment, which are rewarded by the financial markets in terms of lowering equity risk.