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

I construct a measure of cash flow duration at the firm level and link it to carbon emissions of the same firm. Firms with higher carbon emissions generate their cash flows in the near term, reflecting that long-term cash flows are relatively more exposed to transitional climate risks. This relationship leads to high correlations of emission and duration premiums. Until 2008, risk-adjusted returns increase with emissions and decrease with duration. Thereafter, high emission and low duration stocks underperform. Return differences are driven by emissions instead of duration. Overall, these patterns are consistent with a change in investors' climate concerns after 2008. This change sheds light on divergent findings in the literature on the effect of emissions on stock performance and, together with the relationship between duration and carbon emissions, explains much of the recent underperformance of value stocks