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New Research Predicts Impact of Carbon Emissions on Stock Prices

New Research Predicts Impact of Carbon Emissions on Stock Prices

Researchers from University of Waterloo suggested that companies that fail to control carbon emission may lead to asset devaluation and stock price depreciation

A team of researchers from University of Waterloo deduced that firms that fail to curb their carbon emission may suffer the consequences of asset devaluation and stock price depreciation. Moreover, the failure of companies that fall under the emission-intensive sector to take actions for carbon reduction can adversely impact the general stock market within a decade. The research was published in the Journal of Sustainable Finance & Investment on September 21, 2018.

According to lead author Mingyu Fang, a PhD candidate in Waterloo's Department of Statistics & Actuarial Science, companies from the carbon-intensive sectors that fail to undertake efficient emission abatements are expected to face fundamental devaluations in their stocks. The team stated that climate change impacts investment portfolios through two channels: direct and indirect. The direct channel elevates weather-related physical risk on real properties and infrastructure assets. This can be extended to increased market risk in equity holdings with material business exposures in climate-sensitive regions. The indirect channel suggests strict environmental regulations and higher emission cost as a major driver in a global effort in emission control that may induce downturns in carbon-intensive industries that have a portfolio with material positions.

According to the researchers, indirect impact of climate change on investments may be transformed into a political risk that threatens particular asset classes, which are often referred to as the investment carbon risk. The researchers analyzed an inter-temporal analysis of stock returns and studied 36 publicly traded large emitters and related sector indices from Europe and North America around the ratification of major climate protocols. The team found that nine out of 36 samples displayed recognizable carbon pricing. The historical performance of the major sectors that emit high carbon such as energy, utilities, and material was distinguished with other industries. The data revealed that the carbon-intensive sectors were consistent in ranking at the bottom of the list across the metrics used and underperformed by the market indices for both Europe and North America.