The pricing of low emission transitions: Evidence from stock returns of natural resource firms in the GCC

Promoting a green financial sector is imperative to achieve the goals of circular economies. The role of green finance is not only limited to providing robust financing for the transition but is also relevant to sustaining environmentally friendly business models. This research aims to evaluate whether investors demand a risk premium for transitions to low emission firms in countries where high emitters from natural resources-related firms exhibit significant market power. We use a time series sample of firms from six GCC countries between 2011 and 2020 and introduce an emission-based risk factor in the conventional asset pricing framework. Our findings suggest that carbon emissions are systematically priced in the stock returns. Therefore, we argue that the investors will require additional compensation to include low emitters in their portfolios to substitute for more polluting but dominant firms resulting in a higher cost of capital for green firms. We suggest that fiscal interventions in the short to medium term can help in incentivizing the investors to adopt sustainable investment styles. • The study employs a time series sample of six GCC countries from 2011 to 2020. • The study introduces an emission-based risk factor in the conventional asset pricing framework. • The results suggest that carbon emissions are systematic and are priced in stock returns. • These findings are not encouraging from a pro-ecological perspective. • The study suggests that fiscal interventions can help investors adopt sustainable investment styles.