Does carbon performance matter to market returns during climate policy changes? Evidence from Australia

Abstract Tackling climate change has been a global challenge and business corporations are responding to this challenge actively as it directly affects business bottom lines. The ‘win-win’ resolution has been advocated and supported by many prior studies. However, there is a lack of empirical evidence examining how the relationship between corporate environmental performance and financial returns might change if government climate policy changes. This study uses evidence from Australia to explore this question. Australia experienced incredible carbon policy changes within a short time frame during 2009 and 2014 – (1) the ETS move, (2) the carbon tax, and (3) the repeal of the carbon tax, all of which have had profound impacts on the capital market and business behaviour. This study examines the association between carbon performance of listed firms and their market returns during each stage of carbon legislative changes in Australia. It finds that better carbon performance has led to significantly greater market returns during the repeal of the carbon tax, but this positive relationship is not found during the ETS and carbon tax changes despite stronger market reactions to these two stages of policy changes. It also reveals that high emitters in environmentally sensitive industries have suffered the most during the repeal of the carbon tax. The findings imply that lengthy processes of climate policy debate and legislative changes limit the value-enhancing capability of carbon performance. Along with years of policy uncertainty and political instability, the market has become weaker in response to policy changes, but stronger in response to the public call to reward better carbon performers.