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The Impact of Carbon Emissions on Low-Carbon Investment Performance: Evidence From International Carbon Indexes
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Orientador(es)
Resumo(s)
In recent years, climate change has emerged as one of the main global environmental, social,
and economic threats. The rise in the Earth's average temperature is causing species
extinctions and extreme weather events such as droughts and floods. As a result, there is
growing interest in understanding how climate risks affect investment portfolios. The purpose
of this dissertation is to enhance investors' understanding of how climate change affects
investment returns. Specifically, we determined whether low-carbon indexes present superior
risk-adjusted returns compared to carbon-intensive indexes in the USA and Europe regions,
considering the risk factors of the Jensen's Alpha, Carhart's Four-Factor Model, Fama and
French's Five-Factor Models and the Fama-French 5 Factor Model with the addition of the
Volatility factor. This study aims to contribute to the finance field by offering thorough
analyses that can guide investors in making decisions related to climate change and financial
sustainability. By analysing the carbon emissions of low-carbon indexes and comparing them
with their returns, we investigate if indexes with lower emissions achieve better returns than
those with higher emissions. For this analysis, we selected ten low-carbon indexes and four
carbon-intensive indexes from the USA and Europe. We started with an intensive literature
review to adjust our research questions, and then we conduct the analytical part of the thesis
by employing Jensen’s Alpha Model, Carhart's Four-Factor Model, Fama and French's FiveFactor Model and an extension of Fama and French's Five-Factor Model adding a Volatility
factor to control for potential variations in risk exposure between the portfolios. The results
of our study show that investing in low-carbon indexes in the USA can potentially offer more
stable returns, even if they are lower than the S&P500 market and support a less volatility
strategy. There is similarity with the European market since investing in companies with a
lower carbon footprint in Europe may not bring consistently higher returns, either when
comparing portfolios to the market indexes used. However, the results indicate that equallyweighted portfolios have lower volatility and less sensitivity to market changes, which can be
beneficial for investors who are looking to reduce risk and minimise exposure to financial
losses. Finally, sufficient evidence indicated that the inclusion of the volatility factor had a
substantial impact on the model results and on the dispersion of portfolio returns, improving
the accuracy and effectiveness of the models in analysing low-carbon and carbon-intensive
portfolios.
Descrição
Dissertation presented as the partial requirement for obtaining a Master's degree in Statistics and Information Management, specialization in Risk Analysis and Management
Palavras-chave
Carbon Emissions Low-carbon Financial Return Risk Carbon Footprint Carbon-intensive Environment Economics Sustainable Development SDG 7 - Affordable and clean energy SDG 12 - Responsible production and consumption SDG 13 - Climate action