CUHK Business School Research Reveals Carbon-intensive Firms' Stock Prices Drop in Abnormally Warmer Months | Be Korea-savvy

CUHK Business School Research Reveals Carbon-intensive Firms’ Stock Prices Drop in Abnormally Warmer Months

(image: KobizMedia/ Korea Bizwire)

(image: KobizMedia/ Korea Bizwire)


HONG KONG, CHINA, Jun. 29 (Korea Bizwire) – People revise their beliefs about global warming when experiencing abnormally warmer climate, research by CUHK Business School reveals.

Climate change is a term too familiar in our daily lives. While we lament over the rising sea levels, melting glaciers and intense wildfires, most people do not seem to mind a few degrees warmer – unless they experience it on a personal level. Hongkongers would agree as the city just had a record-broken heatwave in May since 1963.

A research study by The Chinese University of Hong Kong (CUHK) Business School aims to investigate how the public realises and responds to the impact of global warming.

Conducted by Prof. Darwin Choi, Prof. Zhenyu Gao and Prof. Wenxi Jiang, all are assistant professors from CUHK Business School’s Department of Finance, the paper entitled Attention to Global Warming argues that people pay more attention to climate change after experiencing extreme weather conditions in their own area.

“Since attention is limited, people tend to overlook the effects of long-term global warming in normal times. Extreme local weather events therefore serve as wake-up calls that alert investors to climate risk,” says Darwin Choi, Assistant Professor of Department of Finance at CUHK Business School.

“Our study tests whether this is true, plus whether this extra attention will have an impact on the financial market,” he says.

He explains that if investors pay more attention after extreme weather, they will buy firms with low carbon emissions and sell firms with high carbon emissions, such that the former outperforms the latter.

The Study

To identify investors’ reactions to global warming under extreme local weather conditions, Google Search Volume Index (SVI) of the topic “Global Warming” in major cities in the world was used to measure people’s attention. This study looked at the monthly SVI in each of the 74 locations from 2004 to 2016.

In addition, daily weather data was obtained from the Global Surface Summary of Day Data, produced by the National Climatic Data Center, containing weather records from over 9,000 stations globally. Abnormal weather events were determined in comparison to the average daily temperature, wind speed and total rain or snowfall.

Companies’ carbon emission estimates were collected from MSCI ESG Ratings, which studies greenhouse emissions of more than 8,600 companies worldwide. Further stock and company information were obtained from Thomson Reuters DataStream with more than 100,000 equities in almost 200 countries. Additionally, the price of carbon was measured by carbon future prices through EUA Futures Contracts.

After collecting international temperature and financial data in 74 cities with major stock exchanges, including London, New York, Tokyo, Hong Kong, Shanghai and Shenzhen, the preliminary results of the study reveal some interesting truth.

Investors React to Abnormal Weather

The overall results show that during abnormally warm months, investors in that city searched more information related to global warming and stock prices of carbon-intensive firms in the city’s exchange decreased relatively.

“Not all cities in the world are equally warm in a given month; people tend to seek more information about global warming if they live in cities that have relatively higher abnormal temperature, compared to other cities in that month,” he adds.

As for investors, they also adjust their behavior accordingly.

“We find evidence that carbon-intensive firms earn lower stock returns than other firms when the local exchange city is abnormally warmer in that month,” he says.

The idea that investors pay more attention to local weather events is consistent with personal experience, as supported by other recent research on climate change: e.g. personal experiences of global warming reported in surveys led to increased perception of climate risk in the U.S.; people are more likely to donate to a global-warming charity when they experience it first-hand.

“Those studies are measured by surveys. Our study, however, uses objective proxies for attention — we are able to see if people read more about global warming from the Internet after their experiences of weather,” he says.

Although the preliminary results may seem encouraging, future tests are anticipated to face challenges.

“One concern is that there are two trends: EMC (EMISSION Minus CLEAN) portfolio returns have been more negative in recent years as price of carbon has gone up and abnormally high temperatures also occurred more frequently later in the sample,” he comments.

He further explains that a higher carbon price would imply that the effect of climate change on carbon-intensive firms is stronger, which would push down the valuation of these firms even further.

To address this concern, the study included year-month fixed effects in order that the test focused on geographical variation. In other words, stock prices of high-emission firms go down more if the city has a relatively higher abnormal temperature, compared to other cities in the same month.

Prof. Choi notes that future tests will directly control for the carbon futures price to distinguish the effect of attention on carbon-intensive firms from the effect of carbon price.

“The impact of climate on stock prices can happen through multiple channels that are not mutually exclusive,” he explains, highlighting the complexity of the study as multiple factors, such as regulations on emissions and investor preference based on social responsibility that can also influence the stock prices.

In order to fully understand investors’ reactions to global warming, the researchers looked at firms with high and low sensitivities to global warming.

“Firms are highly sensitive to climate risk if they belong to industries that are identified as major emission sources by the Intergovernmental Panel on Climate Change (IPCC), or if they have higher carbon emission levels relative to industry peers, as estimated by MSCI,” he says.

“We also plan to study firms that are likely to be hurt by climate change but unlikely to be targeted by climate policies,” he says.

He quotes food companies as an example. “If the price impact of abnormal weather is significant for firms in the food industry, it will provide evidence that investors are updating their priors on climate risk and not just on policies.”

It is essential to differentiate between beliefs about climate change and beliefs about climate policies. One way to tackle this is by comparing countries that have signed the Paris Agreement and those who have not.

“Despite all the scientific facts and evidence about global warming, it is not clear whether people treat climate risk seriously and react to it, our study fills the gap by offering some objective evidence of their reactions,” he concludes.


Choi, Darwin and Gao, Zhenyu and Jiang, Wenxi, Attention to Global Warming (May 17, 2018). Available at SSRN: or

This article was first published in the China Business Knowledge (CBK) website by CUHK Business School:

About CUHK Business School

CUHK Business School comprises two schools — Accountancy and Hotel and Tourism Management — and four departments — Decision Sciences and Managerial Economics, Finance, Management and Marketing. Established in Hong Kong in 1963, it is the first business school to offer BBA, MBA and Executive MBA programmes in the region. Today, the School offers 8 undergraduate programmes and 13 graduate programmes including MBA, EMBA, Master, MSc, MPhil and Ph.D.

In the Financial Times Global MBA Ranking 2018, CUHK MBA is ranked 43rd. In FT’s 2017 EMBA ranking, CUHK EMBA is ranked 32nd in the world. CUHK Business School has the largest number of business alumni (34,000+) among universities/business schools in Hong Kong — many of whom are key business leaders. The School currently has about 4,400 undergraduate and postgraduate students and Professor Kalok Chan is the Dean of CUHK Business School.

About CUHK Business School
Established in Hong Kong in 1963, CUHK Business School is the first business school to offer BBA, MBA and EMBA programs in the region. The School currently has 4,300+ students and the largest number of business alumni (34,000+) in Hong Kong.


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Source: CUHK Business School via Media OutReach

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