Are climate risks priced by environmentally sustainable rated share portfolios?

Abstract

The conversation on climate change has gained momentum in the last few years sparking investor interest in understanding the broad impact of climate change risk on the overall financial system. To further develop this theory, this research sort to determine if climate risks are priced by Environmentally Sustainable rated share portfolios. The results found that there is price impact as most variables where statistically significant across BRIC countries apart from South Africa. These results are not surprising as they align with other similar studies conducted for other asset classes like real estate. These results were generated by regressing environmentally sustainable rated share portfolio abnormal returns against Temperature, Climate Change Policy and Green Technological Adaptability Shifts as proxies for climate risks. Ordinary Least Squares methodology (OLS) and Time-Varying Parameter regressions (VPR) models are used over a 14-year period from 2006 to coincide with the launch of the United Nations Principle for Responsible Investing, in the same year. Intuitively these results are not surprising given that climate change is a hot topic and markets have since 2015, started to active shift capital into sustainable investments, to align with the climate action initiatives like the Paris Accord