Pollution premium: further evidence

Official URL: https://dx.doi.org/10.1016/j.gfj.2026.101288

This paper provides new empirical evidence on the pollution premium documented by Hsu et al. (2023). We show that the premium exists exclusively within industries: investors penalize firms that pollute more than their sector peers but do not demand higher returns from firms in inherently dirtier industries. Furthermore, only emission intensity, defined as total emissions scaled by firm size, is priced; neither the level of nor growth in raw emissions commands a return premium. The pollution premium has strengthened considerably in recent years and is more pronounced during periods of elevated climate policy uncertainty and heightened media environmental concerns. Consistent with a risk-based interpretation, high-emission intensity firms are more vulnerable to policy-driven revenue declines and exhibit greater earnings volatility when regulatory enforcement intensifies. Alternative explanations based on costly arbitrage, informational frictions, and earnings surprises lack the power to subsume the premium. Although certain categories of institutional investors reduce holdings in high-emission intensity firms, the economic magnitude of such divestment remains modest.