Does carbon intensity explain European stock returns beyond beta?

The question

The CAPM says beta should be all you need to explain expected returns. In practice, investors increasingly price in climate risk and sustainability. If that is true, a firm's carbon intensity or ESG performance should carry information about returns that beta does not.

Do carbon intensity and ESG performance add explanatory power beyond beta for cross-sectional asset returns?

Data

Monthly returns and fundamentals for European listed firms from 2015 to 2025, pulled from WRDS, matched with emissions and ESG data from Refinitiv Workspace. Merging the two sources on firm identifiers and dates is a large part of the work.

SELECT r.isin, r.month, r.ret, e.carbon_intensity, e.esg_score
        FROM monthly_returns r
        JOIN esg_annual e
          ON e.isin = r.isin
         AND e.year = EXTRACT(YEAR FROM r.month) - 1;  -- lag ESG data one year

Approach

• Estimate each stock's beta against a European market index.
• Run cross-sectional regressions of returns on beta, then add carbon intensity and ESG scores to see whether they are priced.
• Check robustness with standard controls such as size and value.

Results