Addressing the topic of ethical investment, this paper considers stock market indices related to climate change and provides the first comprehensive analysis of the links between low-carbon equities and conventional equities. Results show that in the long run, low carbon economy indices do not behave like conventional indices, and no balance relationship is identified between the two, such that investors can find in the low-carbon sector an opportunity to diversify investment as an alternative to traditional equity investment. In the short-run, the two investment segments display identical behaviour, especially in contemporary terms, with daily dynamics driven fundamentally by market factors. These results will help regulators and policy makers to design policies for sustainable equity investment according to macroprudential policies.
Policy implications
- Investors find in the low-carbon sector a real opportunity to diversify investment, as an alternative to traditional equity investment.
- Regulators should adopt adequate actions to limit down-side risk and risk of contagion across equity segments, preventing the occurrence of major crisis events.
- Financial authorities and financial markets should improve the information available to investors, minimizing asymmetric information and controlling adverse selection.
- Policy makers should design policies for sustainable equity investment in line with macroprudential policies.
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