Climate Change Effects in Stock Markets

Abstract

Climate change significantly impacts global stock markets through both short-term extreme weather events and long-term climate shifts. This study examines the relationship between CO2 emissions and stock returns across 19 countries from 2001 to 2020 using regression analysis. The findings also reveal a positive correlation between CO2 emissions and stock returns, indicating that investors anticipate higher returns to offset climate-related risks. This suggests that higher CO2 emissions drive investor expectations for increased returns to compensate for potential economic losses. The study highlights the importance of balanced emission reduction strategies and promoting green finance to support sustainable economic growth. Additionally, it underscores the need to integrate climate risks into financial decision-making, offering valuable insights into the financial implications of climate change and guiding policymakers and investors in addressing these challenges. By providing empirical evidence on the link between CO2 emissions and stock returns, this research enriches existing knowledge and emphasizes the financial risks and opportunities presented by climate change. The study's results align with the carbon risk premium theory, which posits that investors demand higher returns from companies with higher carbon emissions. This study advocates for policies that balance economic growth with environmental sustainability, promoting green finance initiatives to facilitate the transition to a low-carbon economy and mitigate the adverse effects of climate change on financial markets.