Climate risk exposure and the cross-section of Chinese stock returns

This paper examines the role of climate risk exposure in the cross-sectional pricing of individual stocks in China. We find a premium of low climate risk exposure: stocks with low climate risk exposure significantly outperform those with high climate risk exposure by 0.83% to 0.90% per month in the future, on a risk-adjusted basis. Results of Fama-MacBeth regressions show that the premium of low climate risk exposure remains after controlling for well-known pricing factors. Moreover, a range of alternative settings confirms that the premium is extremely robust. Finally, climate risk exposure is a combination of pricing factors such as profitability and investment, which provides potential explanations for our results. Our study documents the importance of climate risk in cross-sectional pricing in the Chinese stock market.