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The pricing of low emission transitions: Evidence from stock returns of natural resource firms in the GCC

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  • Pan, Changchun
  • Sun, Tiezhu
  • Mirza, Nawazish
  • Huang, Yuzhe

Abstract

Promoting a green financial sector is imperative to achieve the goals of circular economies. The role of green finance is not only limited to providing robust financing for the transition but is also relevant to sustaining environmentally friendly business models. This research aims to evaluate whether investors demand a risk premium for transitions to low emission firms in countries where high emitters from natural resources-related firms exhibit significant market power. We use a time series sample of firms from six GCC countries between 2011 and 2020 and introduce an emission-based risk factor in the conventional asset pricing framework. Our findings suggest that carbon emissions are systematically priced in the stock returns. Therefore, we argue that the investors will require additional compensation to include low emitters in their portfolios to substitute for more polluting but dominant firms resulting in a higher cost of capital for green firms. We suggest that fiscal interventions in the short to medium term can help in incentivizing the investors to adopt sustainable investment styles.

Suggested Citation

  • Pan, Changchun & Sun, Tiezhu & Mirza, Nawazish & Huang, Yuzhe, 2022. "The pricing of low emission transitions: Evidence from stock returns of natural resource firms in the GCC," Resources Policy, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:jrpoli:v:79:y:2022:i:c:s0301420722004299
    DOI: 10.1016/j.resourpol.2022.102986
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    2. Chen, Zhonglu & Umar, Muhammad & Su, Chi-Wei & Mirza, Nawazish, 2023. "Renewable energy, credit portfolios and intermediation spread: Evidence from the banking sector in BRICS," Renewable Energy, Elsevier, vol. 208(C), pages 561-566.
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    More about this item

    Keywords

    Green finance; Natural resources; Carbon emissions; Asset pricing;
    All these keywords.

    JEL classification:

    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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