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Corporate Responses to Climate Change and Financial Performance: The Impact of Climate Policy

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Abstract

This paper examines the relationship between corporate activities to address climate change and stock performance. By separately analyzing the US and European stock markets for different sub-periods, we highlight the impact of the underlying climate policy regime. Methodologically, we compare risk-adjusted returns of stock portfolios comprising corporations that differ in their responses to climate change. In this respect, we apply the flexible Carhart fourfactor model besides the restricted one-factor model based on the Capital Asset Pricing Model (CAPM). While our portfolio analysis shows negative relationships over the entire observation period from 2001 to 2006, we find that a trading strategy, which bought stocks of corporations with a higher level of responses to climate change and sold stocks of corporations with a lower level, led to negative abnormal returns in regions and periods with less ambitious climate policy, but to positive abnormal returns in regions and periods with stringent climate policy.

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Bibliographic Info

Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 09/105.

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Length: 41 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:eth:wpswif:09-105

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Related research

Keywords: Climate change; Climate policy; Corporate environmental performance; Financial performance; Portfolio analysis; Asset pricing models;

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Cited by:
  1. Oberndorfer, Ulrich, 2009. "Energy prices, volatility, and the stock market: Evidence from the Eurozone," Energy Policy, Elsevier, vol. 37(12), pages 5787-5795, December.

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