The impact of carbon emissions on stock returns

This thesis analyses the relationship between greenhouse gas (GHG) emissions and stock returns, at both the country and industry level. We examine the returns of portfolios formed  on the basis of their total carbon emissions during the period from January 2008 to December 2017. In contrast to prior research that investigates the impact carbon emissions have on firm performance and accounting values, we consider the impact on stock returns. We estimate the relationship between carbon emissions and stock returns by forming portfolios of High emitting stocks, Low emitting stocks, and a difference portfolio, formed on the basis of their position above or below the 50th percentile. We find that there is a negative relationship between total carbon emissions and stock returns in the U.S., Asia Pacific and European portfolios but not in the Japanese market. We extend this analysis to examine the industry level and find consistent statistically significant negative relationships between carbon emissions and stock returns in most industries in each of the four regions. This thesis makes three contributions to the extant literature. First, the analysis of the relationship between GHG emissions and stock returns enhances our understanding of how investors and the market perceive the impact of carbon emissions on performance; importantly we already understand the impact of GHG emissions on firm valuation and accounting measures of performance, but not the impact on stock returns. Secondly, by extending this analysis to incorporate an industry breakdown, we contribute to the literature by highlighting how GHG emissions impact stock returns by analysing whether this differs across industries. Thirdly, by conducting an analysis at the country level, we contribute to the literature by determining if the relationship between GHG emissions and stock returns differs between regulatory environments that are dramatically different from each other in terms of their specific initiatives that are used to combat climate change.