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Canadian Climate Transition Policy Risk and the Performance of Green versus Brown Stocks

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  • Hany Fahmy

Abstract

Using a novel classification of climate policies and an encompassing definition of climate transition policy risk (CTPR), I construct a monthly news-based Canadian CTPR (CDN-CTPR) index by performing a textual analysis on articles published in six leading Canadian newspapers between April 1988 and December 2024. Using data on green and brown firms in the TSX/S&P composite index, I test the validity of the high-return low-volatility hypotheses of green versus brown firms after increases in CTPR. I find that Canadian green firms outperform brown firms when concerns about climate change, which are driven by the constructed CDN-CTPR index, strengthen in the news. As for the impact of the CDN-CTPR index on volatility, I find that a contemporaneous increase in the CDN-CTPR index is associated with a contemporaneous decrease in the volatility of green stocks and increase in the volatility of brown stocks. I deduce that Canadian green firms are more resilient and adaptable to climate policy risk as opposed to brown firms.

Suggested Citation

  • Hany Fahmy, 2025. "Canadian Climate Transition Policy Risk and the Performance of Green versus Brown Stocks," Canadian Public Policy, University of Toronto Press, vol. 51(S2), pages 44-63, November.
    • Handle: RePEc:cpp:issued:v:51:y:2025:i:s2:p:44-63
    DOI: 10.3138/cpp.2025-011
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    JEL classification:

    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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