Investors’ Delight? Climate Risk in Stock Valuation during COVID-19 and Beyond

Abstract

We use the COVID-19 pandemic period in 2020 as an exogenous shock event to assess in how far climate risks measured by carbon exposure have entered and established themselves in the valuation of global stocks. In addition to descriptive analyses, we conduct cross-sectional panel regressions to assess the influence of carbon intensity levels on return and risk characteristics during and after the shock period. Furthermore, a difference-in-differences model setup allows us to infer whether these influences were significantly different when comparing pre-shock, shock, and post-shock periods. We find that carbon intensity affected returns significantly and negatively during a time of high uncertainty. In fact, high-emitting stocks suffered significantly more compared to the pre-crisis period. However, they could make up for their additional losses in the recovery period. In line with their high-risk exposure towards stranded assets and climate policy uncertainty, carbon-intensive stocks face higher risk levels in more stable economic times, thus justifying a carbon premium.

Do stock markets value green operations? Evidence from India

“…Prior studies have examined the impact of greenness on firm performance and valuation. Some studies report a linear relationship (Benz-Saliasi, 2020;Jacob and Nerlinger, 2021), and others report a non-linear relationship (Lin et al, 2021;Neumann, 2021). However, it is not clear from these studies what is the channel of this impact.…”

Risk measures and portfolio analysis in the paradigm of climate finance: a review

“…Some studies use modified or alternate linear models with introductions of different terms such as explicit and implicit risk factors (Mazzarano et al. 2021 ), factors capturing the impact of COVID-19 (Jacob and Nerlinger 2021 ), and news sentiment (Tham and Kang 2022 ). Based on Koch and Bassen’s work with electric utilities (Koch and Bassen 2013 ), Maddox studies a linear model with premia each for the market, energy, and carbon emissions (Maddox 2018 ).…”

“…( 2021 ) 2021 FFE Positive Bernardini et al. ( 2021 ) 2021 FFE Negative Bolton and Kacperczyk ( 2021a ) 2021 LRM Positive Bolton and Kacperczyk ( 2021b ) 2021 LRM Positive Brunborg and Haldorsen ( 2021 ) 2021 FFE None Jacob and Nerlinger ( 2021 ) 2021 LRM – Ji et al. ( 2021 ) 2021 FFE Negative Mazzarano et al.…”