SSHRC Spotlight: Carbon emissions are bad for the environment, but are they also bad for financial markets?

Ilias Tsiakas

This research from economics professor Ilias Tsiakas is funded by a SSHRC Insight Grant.

What does this research focus on?

This research compares the performance of investment portfolios that divest from high-carbon emitting firms against those that are indifferent about carbon footprint, evaluating whether emissions are associated with more or less productive assets. It also investigates the effect of recent environmental regulation, such as the Ontario cap-and-trade scheme, on the profitability and financial performance of affected firms.

What problem or challenge are you addressing with this research?

This research will investigate two important aspects of the relation between carbon emissions and global financial markets. The first aspect relates to the effect of environmental regulation on financial markets. In the context of the new Ontario cap-and-trade scheme, we will investigate the relation between stock returns and the price and quantity of carbon emission allowances. The second aspect involves a comprehensive analysis of low-carbon investments in order to assess how a firm’s carbon footprint is related to its risk and return.

What is your research approach?

We will collect data on the carbon emissions of a large number of firms in the US, Canada and Europe. We will then study the relation between carbon emissions, firm profitability and stock returns. For provinces/states or countries under a cap-and-trade scheme, we will also study the pricing of carbon emission allowances.

What impact do you hope this research will have?

Many countries around the world are trying to determine what the best way is to use financial markets to regulate carbon emissions in a way that halts global warming. At the same time, many institutional investors have formally committed to reducing the carbon footprint of the firms in their portfolios. Our research will shed light on these issues.

What’s next?

We hope to be at the forefront of climate finance as a new research field, and also be part of the discussion in providing useful insights to policy makers and investors on the interaction between carbon emissions and financial markets.