Corporate Responses to Climate Change and Financial Performance: The Impact of Climate Policy
CER-ETH - Center of Economic Research at ETH Zurich, Working paper No. 09/105
41 Pages Posted: 27 Feb 2009
Date Written: February 2009
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 four-factor 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.
Keywords: Climate change, Climate policy, Corporate environmental performance, Financial performance, Portfolio analysis, Asset pricing models
JEL Classification: Q54, Q48, M14, G11, G12
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