Quantifying Downstream Value Chain Carbon Risk: A Six-Factor Asset Pricing Model for China’s Low-Carbon Transition

Sustainable finance and carbon risk have attracted substantial interest from both practitioners and scholars. This paper integrates the income-based environmental responsibility framework with financial asset pricing models to investigate how carbon transition risk propagates along value chains and impacts asset returns. By utilizing the Ghosh supply-driven input–output model to quantify downstream value chain carbon emissions as a proxy for the dependence of a company’s revenue streams on high-carbon downstream clients, we construct a novel downstream carbon risk factor (DMC) by sorting stocks into portfolios based on this exposure and forming a factor mimicking long short portfolio. We then integrate this DMC factor into the Fama–French five-factor framework to propose a six-factor model capable of capturing value chain risk transmission. Empirical results of Chinese A-share listed companies demonstrate that firms with high DMC exposure, being vulnerable to carbon transition shocks such as carbon pricing, offer a significant risk premium even after controlling for traditional financial characteristics. This finding provides robust evidence for the carbon premium hypothesis in the world’s largest emerging market and contributes a theoretically grounded and empirically implementable framework for integrating value chain carbon risk into asset pricing analysis.

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Publication Details

Journal
Mathematics
Published
2026-01-21
DOI
https://doi.org/10.3390/math14020363
Primary Topic
Corporate Social Responsibility Reporting
Type
article
Field-Weighted Citation Impact
0.00

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article

Quantifying Downstream Value Chain Carbon Risk: A Six-Factor Asset Pricing Model for China’s Low-Carbon Transition

Wenqing Wang, Sanmang Wu, Ling Shao
Mathematics
Corporate Social Responsibility Reporting
article

Quantifying Downstream Value Chain Carbon Risk: A Six-Factor Asset Pricing Model for China’s Low-Carbon Transition

Wenqing Wang, Sanmang Wu, Ling Shao
article en

Abstract

Sustainable finance and carbon risk have attracted substantial interest from both practitioners and scholars. This paper integrates the income-based environmental responsibility framework with financial asset pricing models to investigate how carbon transition risk propagates along value chains and impacts asset returns. By utilizing the Ghosh supply-driven input–output model to quantify downstream value chain carbon emissions as a proxy for the dependence of a company’s revenue streams on high-carbon downstream clients, we construct a novel downstream carbon risk factor (DMC) by sorting stocks into portfolios based on this exposure and forming a factor mimicking long short portfolio. We then integrate this DMC factor into the Fama–French five-factor framework to propose a six-factor model capable of capturing value chain risk transmission. Empirical results of Chinese A-share listed companies demonstrate that firms with high DMC exposure, being vulnerable to carbon transition shocks such as carbon pricing, offer a significant risk premium even after controlling for traditional financial characteristics. This finding provides robust evidence for the carbon premium hypothesis in the world’s largest emerging market and contributes a theoretically grounded and empirically implementable framework for integrating value chain carbon risk into asset pricing analysis.

MathematicsVol. 14(2)
China University of Geosciences (Beijing) (CN)
National Natural Science Foundation of China
Openalex Percentile: Top 83%
Corporate Social Responsibility Reporting
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