IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v13y2021i21p12182-d672371.html
   My bibliography  Save this article

Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond

Author

Listed:
  • Andrea Jacob

    (Chair of Finance and Banking, University of Augsburg, Universitaetsstr. 16, 86159 Augsburg, Germany)

  • Martin Nerlinger

    (School of Finance, University of St. Gallen, Unterer Graben 21, 9000 St. Gallen, Switzerland)

Abstract

We use the COVID-19 pandemic period in 2020 as an exogenous shock event to assess in how far climate risks measured by carbon exposure have entered and established themselves in the valuation of global stocks. In addition to descriptive analyses, we conduct cross-sectional panel regressions to assess the influence of carbon intensity levels on return and risk characteristics during and after the shock period. Furthermore, a difference-in-differences model setup allows us to infer whether these influences were significantly different when comparing pre-shock, shock, and post-shock periods. We find that carbon intensity affected returns significantly and negatively during a time of high uncertainty. In fact, high-emitting stocks suffered significantly more compared to the pre-crisis period. However, they could make up for their additional losses in the recovery period. In line with their high-risk exposure towards stranded assets and climate policy uncertainty, carbon-intensive stocks face higher risk levels in more stable economic times, thus justifying a carbon premium.

Suggested Citation

  • Andrea Jacob & Martin Nerlinger, 2021. "Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond," Sustainability, MDPI, vol. 13(21), pages 1-17, November.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:21:p:12182-:d:672371
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/13/21/12182/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/13/21/12182/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ľuboš Pástor & M Blair Vorsatz & Jeffrey Pontiff, 0. "Mutual Fund Performance and Flows during the COVID-19 Crisis," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 791-833.
    2. Samuel M. Hartzmark & Abigail B. Sussman, 2019. "Do Investors Value Sustainability? A Natural Experiment Examining Ranking and Fund Flows," Journal of Finance, American Finance Association, vol. 74(6), pages 2789-2837, December.
    3. Arno Riedl & Paul Smeets, 2017. "Why Do Investors Hold Socially Responsible Mutual Funds?," Journal of Finance, American Finance Association, vol. 72(6), pages 2505-2550, December.
    4. Bolton, Patrick & Kacperczyk, Marcin, 2021. "Do investors care about carbon risk?," Journal of Financial Economics, Elsevier, vol. 142(2), pages 517-549.
    5. Zhang, Dayong & Hu, Min & Ji, Qiang, 2020. "Financial markets under the global pandemic of COVID-19," Finance Research Letters, Elsevier, vol. 36(C).
    6. Stefano Ramelli & Alexander F. Wagner, 2020. "Feverish Stock Price Reactions to COVID-19," Swiss Finance Institute Research Paper Series 20-12, Swiss Finance Institute.
    7. Yuli Shan & Jiamin Ou & Daoping Wang & Zhao Zeng & Shaohui Zhang & Dabo Guan & Klaus Hubacek, 2021. "Impacts of COVID-19 and fiscal stimuli on global emissions and the Paris Agreement," Nature Climate Change, Nature, vol. 11(3), pages 200-206, March.
    8. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    9. Rui Albuquerque & Yrjo Koskinen & Shuai Yang & Chendi Zhang, 2020. "Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 593-621.
    10. Stefano Ramelli & Alexander F Wagner & Richard J Zeckhauser & Alexandre Ziegler, 2021. "Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections [Asset pricing with liquidity risk]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 10(4), pages 748-787.
    11. Nils Engelhardt & Jens Ekkenga & Peter Posch, 2021. "ESG Ratings and Stock Performance during the COVID-19 Crisis," Sustainability, MDPI, vol. 13(13), pages 1-15, June.
    12. Shehzad, Khurram & Xiaoxing, Liu & Kazouz, Hayfa, 2020. "COVID-19’s disasters are perilous than Global Financial Crisis: A rumor or fact?," Finance Research Letters, Elsevier, vol. 36(C).
    13. Ashraf, Badar Nadeem, 2021. "Stock markets’ reaction to Covid-19: Moderating role of national culture," Finance Research Letters, Elsevier, vol. 41(C).
    14. Broadstock, David C. & Chan, Kalok & Cheng, Louis T.W. & Wang, Xiaowei, 2021. "The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China," Finance Research Letters, Elsevier, vol. 38(C).
    15. Karl V. Lins & Henri Servaes & Ane Tamayo, 2017. "Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis," Journal of Finance, American Finance Association, vol. 72(4), pages 1785-1824, August.
    16. Pedersen, Lasse Heje & Fitzgibbons, Shaun & Pomorski, Lukasz, 2021. "Responsible investing: The ESG-efficient frontier," Journal of Financial Economics, Elsevier, vol. 142(2), pages 572-597.
    17. Mazur, Mieszko & Dang, Man & Vega, Miguel, 2021. "COVID-19 and the march 2020 stock market crash. Evidence from S&P1500," Finance Research Letters, Elsevier, vol. 38(C).
    18. Rui Albuquerque & Yrjo Koskinen & Shuai Yang & Chendi Zhang, 0. "Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash," Review of Corporate Finance Studies, Oxford University Press, vol. 9(3), pages 593-621.
    19. Daniel, Kent & Titman, Sheridan, 1997. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," Journal of Finance, American Finance Association, vol. 52(1), pages 1-33, March.
    20. Wagner, Alexander F. & Ramelli, Stefano, 2020. "Feverish Stock Price Reactions to COVID-19," CEPR Discussion Papers 14511, C.E.P.R. Discussion Papers.
    21. J.-F. Mercure & H. Pollitt & J. E. Viñuales & N. R. Edwards & P. B. Holden & U. Chewpreecha & P. Salas & I. Sognnaes & A. Lam & F. Knobloch, 2018. "Macroeconomic impact of stranded fossil fuel assets," Nature Climate Change, Nature, vol. 8(7), pages 588-593, July.
    22. Ramelli, Stefano & Ossola, Elisa & Rancan, Michela, 2021. "Stock price effects of climate activism: Evidence from the first Global Climate Strike," Journal of Corporate Finance, Elsevier, vol. 69(C).
    23. Stefano Ramelli & Alexander F Wagner, 2020. "Feverish Stock Price Reactions to COVID-19," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 622-655.
    24. Rachel Shields & Samer Ajour El Zein & Neus Vila Brunet, 2021. "An Analysis on the NASDAQ’s Potential for Sustainable Investment Practices during the Financial Shock from COVID-19," Sustainability, MDPI, vol. 13(7), pages 1-20, March.
    25. Stefano Ramelli & Alexander F Wagner, 0. "Feverish Stock Price Reactions to COVID-19," Review of Corporate Finance Studies, Oxford University Press, vol. 9(3), pages 622-655.
    26. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    27. Mehmet Balcilar & Riza Demirer & Rangan Gupta, 2017. "Do Sustainable Stocks Offer Diversification Benefits for Conventional Portfolios? An Empirical Analysis of Risk Spillovers and Dynamic Correlations," Sustainability, MDPI, vol. 9(10), pages 1-18, October.
    28. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
    29. Kais Bouslah & Lawrence Kryzanowski & Bouchra M’Zali, 2018. "Social Performance and Firm Risk: Impact of the Financial Crisis," Journal of Business Ethics, Springer, vol. 149(3), pages 643-669, May.
    30. Philipp Krueger & Zacharias Sautner & Laura T Starks, 2020. "The Importance of Climate Risks for Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 33(3), pages 1067-1111.
    31. Nofsinger, John & Varma, Abhishek, 2014. "Socially responsible funds and market crises," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 180-193.
    32. Wan, Daoxia & Xue, Rui & Linnenluecke, Martina & Tian, Jinfang & Shan, Yuli, 2021. "The impact of investor attention during COVID-19 on investment in clean energy versus fossil fuel firms," Finance Research Letters, Elsevier, vol. 43(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Siddhartha P. Chakrabarty & Suryadeepto Nag, 2023. "Risk measures and portfolio analysis in the paradigm of climate finance: a review," SN Business & Economics, Springer, vol. 3(3), pages 1-22, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ferriani, Fabrizio, 2023. "Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?," International Review of Financial Analysis, Elsevier, vol. 88(C).
    2. Eisenkopf, Jana & Juranek, Steffen & Walz, Uwe, 2021. "Responsible investment and stock market shocks: Short-term insurance and persistent outperformance post-crisis?," SAFE Working Paper Series 329, Leibniz Institute for Financial Research SAFE.
    3. Garel, Alexandre & Petit-Romec, Arthur, 2021. "Investor rewards to environmental responsibility: Evidence from the COVID-19 crisis," Journal of Corporate Finance, Elsevier, vol. 68(C).
    4. Simona Malovana & Dominika Ehrenbergerova & Zuzana Gric, 2023. "What Do Economists Think About the Green Transition? Exploring the Impact of Environmental Awareness," Working Papers 2023/6, Czech National Bank.
    5. Fariha Jahan & Jungmu Kim, 2023. "Does the Shield Effect of CSR Work in Crises? Evidence in Korea," Sustainability, MDPI, vol. 15(11), pages 1-18, June.
    6. Nils Engelhardt & Jens Ekkenga & Peter Posch, 2021. "ESG Ratings and Stock Performance during the COVID-19 Crisis," Sustainability, MDPI, vol. 13(13), pages 1-15, June.
    7. Liu, Lian & Nemoto, Naoko & Lu, Changrong, 2023. "The Effect of ESG performance on the stock market during the COVID-19 Pandemic — Evidence from Japan," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 702-712.
    8. Rim El Khoury & Nohade Nasrallah & Khaled Hussainey, 2022. "Exploring the performance of responsible companies in G20 during the COVID-19 outbreak," Post-Print hal-03761427, HAL.
    9. Gregory, Richard Paul, 2022. "ESG scores and the response of the S&P 1500 to monetary and fiscal policy during the Covid-19 pandemic," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 446-456.
    10. Ding, Wenzhi & Levine, Ross & Lin, Chen & Xie, Wensi, 2021. "Corporate immunity to the COVID-19 pandemic," Journal of Financial Economics, Elsevier, vol. 141(2), pages 802-830.
    11. Alberto Barroso del Toro & Laura Vivas Crisol & Xavier Tort-Martorell, 2022. "Comparing the Impacts of Sustainability Narratives on American and European Energy Shareholders: A Multi-Event Study Analysing Reactions to News before and during COVID-19," Sustainability, MDPI, vol. 14(23), pages 1-18, November.
    12. Pagano, Marco & Wagner, Christian & Zechner, Josef, 2023. "Disaster resilience and asset prices," Journal of Financial Economics, Elsevier, vol. 150(2).
    13. Cakici, Nusret & Zaremba, Adam, 2021. "Who should be afraid of infections? Pandemic exposure and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    14. Bae, Kee-Hong & El Ghoul, Sadok & Gong, Zhaoran (Jason) & Guedhami, Omrane, 2021. "Does CSR matter in times of crisis? Evidence from the COVID-19 pandemic," Journal of Corporate Finance, Elsevier, vol. 67(C).
    15. Neukirchen, Daniel & Engelhardt, Nils & Krause, Miguel & Posch, Peter N., 2022. "Firm efficiency and stock returns during the COVID-19 crisis," Finance Research Letters, Elsevier, vol. 44(C).
    16. Rouatbi, Wael & Demir, Ender & Kizys, Renatas & Zaremba, Adam, 2021. "Immunizing markets against the pandemic: COVID-19 vaccinations and stock volatility around the world," International Review of Financial Analysis, Elsevier, vol. 77(C).
    17. Fatica, Serena & Panzica, Roberto, 2021. "Sustainable investing in times of crisis: evidence from bond holdings and the COVID-19 pandemic," Working Papers 2021-07, Joint Research Centre, European Commission.
    18. Xiaoling Chu & Chiuling Lu & Desmond Tsang, 2021. "Geographic Scope and Real Estate Firm Performance during the COVID-19 Pandemic," JRFM, MDPI, vol. 14(7), pages 1-16, July.
    19. Srivastava, Jagriti & Gopalakrishnan, Balagopal, 2021. "In-kind financing during a pandemic: Trade credit and COVID-19," MPRA Paper 108951, University Library of Munich, Germany.
    20. Fabio Pisani & Giorgia Russo, 2021. "Sustainable Finance and COVID-19: The Reaction of ESG Funds to the 2020 Crisis," Sustainability, MDPI, vol. 13(23), pages 1-18, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:13:y:2021:i:21:p:12182-:d:672371. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.