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The impact of carbon emissions on investment performance : an empirical analysis of how carbon footprint affects risk-adjusted return for stocks listed on the Oslo Stock Exchange

Midttun, Maria Sunde; Gjengedal, Linnea Øynebråten
Master thesis
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https://hdl.handle.net/11250/2649657
Utgivelsesdato
2019
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  • Master Thesis [3258]
Sammendrag
Climate change have led to a rising interest in how climate risks affect investors

portfolios. The purpose of this thesis is to increase investors understanding of how

climate change can influence investment returns. Specifically, we examine whether

low-carbon investments yield higher risk-adjusted returns than high-carbon investments.

The study focuses on stocks listed at the Oslo Stock Exchange during the period 2010- 2018.

We obtain the risk-adjusted returns by computing alpha estimates for portfolios consisting

of stocks with low carbon footprints (good portfolio) and high carbon footprints (bad

portfolio).We also compute alpha estimates for the difference portfolios based on a zero

investment strategy that goes long the good portfolio and shorts the bad portfolio. The

portfolios are sorted both on their scope 1 and scope 2 emissions. We employ the Captial

Asset Pricing Model and the Carhart four-factor model to control for potential variations

in risk exposure between the portfolios.

Our results report significant positive abnormal returns in the difference portfolio for

scope 1. We further detect negative abnormal returns in the bad portfolios for both scope

1 and scope 2. These results indicate that low-carbon portfolios outperform high-carbon

portfolios and that stocks with high carbon emissions underperform in the market. The

results further suggest that investors holding high-carbon stocks do not receive sufficient

compensation for their level of risk. At a sector-level, stocks with high emissions in our

dataset belong to the energy and industrial sector.

Keywords – Climate Change, Carbon Footprint, Investment Performance

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