Divesting and Re-investing into a Greener Future for Canada

Abstract

Whether Canada chooses to adhere to its responsibilities to meet its climate change targets or not, investors in Canada have a lot to be concerned about. The imminent threat of human induced climate change will have the global community reacting in ways that will affect Canada and their investors. This thesis explored the Canadian equity market through the lens of an investor who is interested in investing with particular strategies that address climate change with respect to carbon emissions. Both modern portfolio theory and behavioral finance theory were explored and demonstrated that both investor types should be concerned about the climate change related risks; that the two theories contending paradigms are bridged on the topic of socially responsible investing concerning carbon related risks in respect to climate change. The two techniques utilized for portfolio construction that addressed carbon related risk and supported moral and ethical ideologies were: tiered divestment of fossil fuel related companies and utilizing carbon footprinting metrics to create best in-class portfolios. Throughout the period of January 2011 to August 2015 the resulting portfolios of the two strategies outperformed relative to their associated benchmark; that is, offering a superior risk/return while mitigating the risk associated to carbon emissions. These results contribute the body of the literature that analyzes the link between socially responsible investing and financial performance.