The University of Waterloo released new findings on carbon output and stock market value, stating that companies that fail to reduce said output will eventually experience asset devaluation and decline of their stock prices. The study, entitled “Sustainable portfolio management under climate change,”was published in the Journal of Sustainable Finance and Investment.
This research speculates that companies that don’t take further action to reduce their carbon emission could cause a general negative impact to the stock market in the coming decade. Their carbon output relates to climate change, which greatly impacts investments in two avenues. It elevates weather risk to physical properties like infrastructure, extending to increased market risk in equity holdings with material business entities in climate-sensitive geography.
Secondly, it indirectly correlates with stricter environmental regulations, which would cause downward movement for the market value of carbon intensive industries.
Lead author Mingyu Fang, a Waterloo Department of Statistics & Actuarial Science PhD candidate, states on this research: “Over the long-term, companies from the carbon-intensive sectors that fail to take proper recognizable emission abatements may be expected to experience fundamental devaluations in their stocks when the climate change risk gets priced correctly by the market.”
“More specifically for the traditional energy sector, such devaluation will likely start from their oil reserves being stranded by stricter environmental regulations as part of a sustainable, global effort to mitigate the effects caused by climate change.”
View the initial release here.
- Fang, M., Tan, K. S., & Wirjanto, T. S. (2018). Sustainable portfolio management under climate change. Journal of Sustainable Finance & Investment, 1-23.