Bindu Gaire Sharma (20328)

Climate Change and Impact on Stock Market

Climate change has been a real concern for the society as well as companies for more than
twenty years now. And at present we can see people paying more and more attention along with
more widespread international cooperation to fight against the climate change. Enterprises hold
economic and social positions in our society so they are in the center of the discussion and are
exposed to climate risks and opportunities directly or indirectly. The risks from climate change
are mostly physical (e.g., hurricanes, rise of sea levels, wildfires), and transition risks, emanating
from the transition to a low carbon economy, which may impose costs on companies (e.g.,
carbon taxation, emission regulation, emergence of competitive green technologies). These risks,
in form of direct damage, business environment change, regulation or reputation issues, have
become important issues for companies these days. In recent years, many corporations have been
increasing pressure to support climate change resolutions and divert from companies’ having the
most negative impact on the climate. So, climate change is important for companies.

The nature of climate change risks varies much from one sector to another, while the risk
exposure depends also on companies’ carbon management strategy and practice. It is seen that
among all sectors (hospitality, financial services, energy, manufacturing, retail, chemical and
pharmaceutical etc.) energy sectors’ emissions are consider the most important and adverse
emission among all. And industries like oil and gas, power-generation, construction and transport
are the most carbon-intensive industries from the energy sector and contribute the most to GHGs
emission. Because of which these industries are considered to be highly sensitive to climate
change and their stock prices are more likely to engage and reflect more climate change risks
than other sectors.

The climate change events over years have marked big advancements of the fight against climate
change, dragging more attention to GHGs emissions control/reduction, and regulation for
companies, potentially higher price for carbon. These issues appear as constraints and bring
possible downside pressure for financial performance of companies. There seems to be negative
change in share price of the carbon-intensive companies, on average, whenever climate change
events occur. However, compared to other carbon-intensive industries mentioned above, the
climate change events are seen to have a very little impact of on sock returns or prices of the
companies from the oil and gas industry as well as a little correlation between stocks returns and
carbon management practices for the industry. This means that some factors other than climate
change have more impact on the gas and oil industry.

In conclusion, looking into the movements of share prices the study has taken into consideration,
climate change issues seem to have negative impacts on carbon-intensive sectors share prices.
The stock market is seen to appreciate and reward (to a certain degree) the good practice of
action of companies to face the climate change risk. Thus, there might be a positive correlation
between company’s carbon management practices and its stock’s performance. However the
significance of this correlation varies among sectors. Even though the fluctuations of share prices
of the companies especially carbon intensive companies are seen to fluctuate during climate
change events, the fluctuation can also be due to other events that worked in the same direction.
So we should also be prudent to conclude that climate change impacts stock market.

Bibliography

Faccini, R., Matin, R., & Skiadopoulos, G. (2021). Are Climate Change Risks Priced in the U.S.
Stock Market? Danmarks National Bank.

Hyafil, A. (n.d.). Do the stock markets price climate change risks?