The Importance of Materiality in Carbon Emissions Screening Examined on Risk and Return in the Utilities Sector

This thesis contributes to the understanding of the industry-specific materiality of carbon emissions and its impact on portfolio performances. The results of this study are important for investors because in past academic papers, a (financial) carbon emissions premium has been identified (Bolton & Kacperczyk, 2019; Garvey et al., 2018; In et al., 2019), but this premium could vary depending on the industry. The portfolio and regression analysis examine returns of portfolio screening strategy, which consists of a 25% best in class threshold, based on MSCI’s Environmental, Social, and Governance (ESG) and carbon emissions ratings obtained from the FactSet database. The results show that there is no major difference in financial performance between the screened portfolios and their unscreened counterparts. The findings implicate that non socially responsible investors do not have an incentive to screen for ESG or carbon emissions ratings, as they are not financially rewarded for it. However, the carbon emissions portfolios minimally outperformed in the portfolio analysis (cumulative return, average return, Jensen’s alpha, and Sharpe ratio), which could indicate that the carbon emissions issue is on the verge of becoming material. Therefore, future research could focus on the date and the intensity of the upcoming carbon emissions  materialization, taking industry-specific materiality into account.