The Effect of Climate Risk on Stock Market Performance Evidence from Sri Lanka

Abstract

This study aims to identify the effect of climate risk on stock market performance in Sri Lanka. As an island, the country is frequently affected by climate change variabilities. Due to the higher climate risk exposure of Sri Lanka, it is highly needed to identify the risk at a prior stage. As, this is the first study in Sri Lanka to identify the climate risk impact on stock market performance the primary objective of this study is to identify the climate risk effect on the All-Share Price Index, Standard and Poor’s SL20 index and 20 industry groups according to the GICS classification. The considered climate risk variables are drought, flood, high wind, heavy rain, landslide, and lightning. The findings of the study revealed there is no significant impact from climate risk variables to the All-Share Price Index, and Standard and Poor’s SL20 index. However, the analysis discovered significant impact of several climate risks to certain specific sectors of CSE such as drought significantly impacts automobiles and components, banking and transportation sectors. At the same time, the high wind is a key factor for food, beverage and tobacco. The drought and high wind influence are significant in sectors like capital goods, utilities, consumer durable and apparel, consumer services, healthcare, equipment and services, materials and household and personal products. As well as drought and lightning have a significant impact on the commercial and professional service sector and energy sector while the diversified financial sector is impacted by drought, high wind and heavy rain. Apart from that, sectors like food and staples, retailing, insurance, real estate and telecommunication are unaffected by any climate risk factor. At the same time, the pharmacy and bio-tech industries are impacted by all the climate risk variables except floods. Ultimately, the study's findings will provide direction to decision-makers including potential investors to consider the climate risk in their decisions making processes.