I'd argue that past performance doesn't necessarily equal the future. Most of the studies cover the period from about 2008 to 2019, a period when the EU carbon price rarely moved above €15 per tonne CO2 and was more likely to be anchored around €5 per tonne CO2. I'd argue that investors didn't need to factor in higher emissions because the cost was so low.
This is also the first piece of research where data on recent European carbon prices have been incorporated into the analysis. In particular the data covers the period since 2018. Analysis of the data revealed a strong statistically significant relationship between higher EU carbon prices and lower equity prices, controlling for the impact that commodity prices (e.g. natural gas, coal, etc.) might have on the price of carbon.
Fair point! That's why in my opinion it's so important to dig into causality and not just predict trends. I'm confident that we can find causal links that hold up even when historical trends do not—in historical data. That being said, I'm still working on it... my own results are not totally robust yet.
Very interesting paper from the IMF! (Great title as well, "The carrot and the stock.") Thanks for sharing both of them. I think that carbon taxes are just part of the mix; investors also care genuinely; plus there might be more systemic links between emissions and financial performance that are yet to be uncovered. (For example, capital expenditures for equipment that allows to reduce carbon emissions while increasing production would be beneficial to the bottom line within a certain amount of years.) The devil is in the detail with those things though.
I hope you like the next piece & findings! To me it feels like a step in the right direction, although more research is still needed (working on it).
I'd argue that past performance doesn't necessarily equal the future. Most of the studies cover the period from about 2008 to 2019, a period when the EU carbon price rarely moved above €15 per tonne CO2 and was more likely to be anchored around €5 per tonne CO2. I'd argue that investors didn't need to factor in higher emissions because the cost was so low.
A paper from the International Monetary Fund (IMF) asks whether European stock markets incorporate carbon prices in company valuations, and to what degree they discriminate between firms with different carbon intensities. https://www.imf.org/en/Publications/WP/Issues/2022/11/18/The-Carrot-and-the-Stock-In-Search-of-Stock-Market-Incentives-for-Decarbonization-525748
This is also the first piece of research where data on recent European carbon prices have been incorporated into the analysis. In particular the data covers the period since 2018. Analysis of the data revealed a strong statistically significant relationship between higher EU carbon prices and lower equity prices, controlling for the impact that commodity prices (e.g. natural gas, coal, etc.) might have on the price of carbon.
Here's another study to add to your list https://cepr.org/voxeu/columns/why-carbon-emissions-are-associated-higher-stock-returns
I'd love to hear more about what you find out. Thanks.
Fair point! That's why in my opinion it's so important to dig into causality and not just predict trends. I'm confident that we can find causal links that hold up even when historical trends do not—in historical data. That being said, I'm still working on it... my own results are not totally robust yet.
Very interesting paper from the IMF! (Great title as well, "The carrot and the stock.") Thanks for sharing both of them. I think that carbon taxes are just part of the mix; investors also care genuinely; plus there might be more systemic links between emissions and financial performance that are yet to be uncovered. (For example, capital expenditures for equipment that allows to reduce carbon emissions while increasing production would be beneficial to the bottom line within a certain amount of years.) The devil is in the detail with those things though.
I hope you like the next piece & findings! To me it feels like a step in the right direction, although more research is still needed (working on it).