Canadian Climate Transition Policy Risk and the Performance of Green versus Brown Stocks

Hany Fahmy

Canadian Public Policy, 2025, vol. 51, issue S2, 44-63

Abstract: Using a novel classification of climate policies and an encompassing definition of climate transition policy risk (CTPR), I construct a monthly news-based Canadian CTPR (CDN-CTPR) index by performing a textual analysis on articles published in six leading Canadian newspapers between April 1988 and December 2024. Using data on green and brown firms in the TSX/S&P composite index, I test the validity of the high-return low-volatility hypotheses of green versus brown firms after increases in CTPR. I find that Canadian green firms outperform brown firms when concerns about climate change, which are driven by the constructed CDN-CTPR index, strengthen in the news. As for the impact of the CDN-CTPR index on volatility, I find that a contemporaneous increase in the CDN-CTPR index is associated with a contemporaneous decrease in the volatility of green stocks and increase in the volatility of brown stocks. I deduce that Canadian green firms are more resilient and adaptable to climate policy risk as opposed to brown firms.

Keywords: climate risk; climate policy; asset pricing; volatility; textual analysis; ESG (search for similar items in EconPapers)
JEL-codes: C33 C58 F64 G11 Q54 (search for similar items in EconPapers)
Date: 2025
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