The Impact of Dow Jones Sustainability Index, Exchange Rate and Consumer Sentiment Index on Carbon Emissions

Abstract

The objective of this study is to examine, over the last 20 years, the short-run and long-run effect on global carbon dioxide (CO2) emissions of the stock returns, exchange rates and consumer confidence. Stock markets contribute to environmental degradation; as a result, we employed, for the first time, Dow Jones Sustainability World Index to use stock returns of socially responsible companies. The euro to US dollar exchange rate is used, as the forex market is the largest financial market and considers it as the largest major pair. The Consumer Sentiment Index is used as a proxy to consumer confidence, since consumer behavior is, also, considered as a major factor linked to environmental degradation. The basic testing procedures employed include the Augmented Dickey–Fuller stationarity test, cointegration analysis and Vector Error Correction Model (VECM). The results establish that stock returns of companies listed on the Dow Jones Sustainability World Index exert a significant negative (positive) impact on the global CO2 emissions in the short (long) term. The inverse, i.e., a significant positive (negative) impact on the short (long) run holds for the both other variables, i.e., US consumers’ confidence and euro to US dollar exchange rates. From the outcomes obtained, policy initiatives that could assist companies to mitigate environmental degradation are recommended.