I use text analysis of U.S. firms' press releases to build monthly measures of their
exposure to environmental policies and to green technologies. I estimate the associated
regulatory risk premium and technological opportunity premium. The time series of
these premia reveal two findings. First, they exhibit a significant negative correlation.
Second, their sign and magnitude depend on the political orientation of the government.
Under Democrat administrations, green policy risk commands a positive premium,
which switches sign under Republican presidents. Firms the most exposed to this
risk have expected returns 1.5% higher under Democrats than under Republicans.
Similarly, green innovation is associated with a negative risk premium under Democrat
mandates, which becomes positive under Republicans. The most innovative firms have
expected returns 3.5% lower under Democrats than under Republicans. I introduce
a tractable consumption-based asset pricing model, which features both policy and
innovation risks as well as their interactions. The model captures well my empirical
findings and explains the impact of governments and policy makers on transition risk
premia.