The asset‐pricing implications of carbon risk in Korea

Abstract This study examines the relationship between carbon risk and stock returns for listed firms in Korea, where firms are legally obligated to disclose their carbon emissions. While previous research mostly focuses on major markets like the United States and the European Union, demonstrating the impact of climate change on asset prices, there is a scarcity of studies examining emerging markets. Using data from Korean‐listed firms from 2011 to 2021, we investigate the association between a firm's exposure to carbon risk and cross‐sectional stock returns. We find that stocks with high exposure to carbon risk exhibit higher average returns and the abnormal returns associated with carbon risk are statistically significant and cannot be explained by the Fama‐French three‐ or five‐factor models. Furthermore, this phenomenon is more evident among stocks with high foreign ownership. Finally, the carbon factor commands a significantly positive risk premium, suggesting that carbon risk is an important risk factor even in emerging markets like Korea.