Climate Change Commitment and Stock Returns in the Gulf Cooperation Council (GCC) Countries

Abstract

Stock returns are a critical aspect of investment decisions, and understanding whether climate change commitment influences stock returns is essential for informed decision-making. This paper investigates the impact of climate change commitment on the stock returns in the GCC countries for non-financial companies during the period of 2010–2023. The sample consisted of a total of 285 companies collected using the Refinitiv Eikon platform. The developed model was estimated using panel GMM regression. The results suggested that when companies reported their climate change commitment, it was appreciated by high demand for their stock and in turn caused the stock return to be higher. In addition, profitability and growth affect stock returns significantly positively, and this implies that investors concentrate on whether the company has higher profits and better growth prospects to demand more shares, and this affects the share prices positively. In addition, the size of a company has been found to affect the stock return positively, and this suggests that investors in the GCC feel confident in demanding the shares of large companies. Moreover, the results showed that leverage significantly negatively affects stock return, and this implies that investors interpret the position of highly leveraged companies to be bad due to worries that companies will not be able to service their loans. Such results might help investors to formulate their investment strategies and select their shares based on significant determinants. Finally, our results hold based on the reported robustness of results.

1. Introduction

The commitment to addressing climate change has emerged as a significant concern in global financial markets, with its impact on firm-level performance becoming more readily apparent, particularly in the Gulf Cooperation Council (GCC) region [1]. As GCC nations commence the diversification of their economies and conform with international sustainability norms, publicly traded companies face increasing pressure to include climate initiatives in their operations and disclosures [2].

Companies that exhibit a proactive dedication to mitigating climate-related risks, via carbon reduction objectives, sustainable investments, or comprehensive ESG disclosures, are frequently regarded as lower-risk and more strategically positioned for long-term value generation [3]. In capital markets, this commitment can affect investor confidence, leading to elevated stock prices, enhanced access to finance, and a reduced cost of equity [4].

The connection between climate change commitment and stock performance in the GCC is complicated and continues to develop [5]. Due to the region’s dependence on petroleum earnings, companies implementing assertive climate transition strategies may encounter short-term financial compromises, particularly in energy-intensive industries [6]. Empirical evidence increasingly indicates that companies with credible climate policies are likely to excel in the long term, particularly as investor demand for sustainable portfolios escalates. Market participants are increasingly valuing openness, resilience, and innovation in climate governance, positioning GCC enterprises that excel in climate action to experience improved stock market performance, especially considering the anticipated global capital shift towards low-carbon assets [7].

This study seeks to analyze the connection between climate change commitment and stock returns in the Gulf Cooperation Council (GCC) area, emphasizing the impact of firm-level sustainability activities on financial performance in resource-dependent economies. The aim is to evaluate whether companies that actively implement climate-related policies, such as carbon targets, renewable energy adoption, or climate risk disclosures, exhibit distinct stock market responses compared to those that do not. This study aims to deliver empirical information regarding the extent to which capital markets in the GCC are starting to include climate-related financial risks and incentivize proactive environmental solutions.

This empirical evidence tries to achieve several objectives: firstly, to investigate the impact of climate change commitment on the stock returns in the GCC region while controlling for firm characteristics and macroeconomic variables; secondly, to provide empirical evidence from the GCC, a region characterized by distinct environmental and economic dynamics, to the global discourse on ESG and financial performance; thirdly, to provide actionable insights for policymakers, investors, and corporate executives concerning the financial significance of environmental initiates in the GCC. Therefore, the research question that this paper tries to answer is as follows: Does the commitment to addressing climate change affect the stock returns in the GCC region for non-financial companies during the period 2010–2023?

This research offers significant contributions to the current literature. Initially, it tackles a significant deficiency by concentrating on the inadequately examined setting of GCC financial markets, in which climate finance is still an emerging domain. Secondly, it enhances the ESG–financial performance discourse by isolating the climate component and assessing its independent impact on stock returns. Third, it provides pragmatic insights for institutional investors and politicians in the region who are progressively integrating ESG measures into their decision-making processes. Finally, this study presents a customized climate commitment indicator that captures regional policy dynamics and sectoral vulnerabilities, thus increasing the significance and use of its findings for both academics and professionals.

Furthermore, when examining the connection between climate change commitment and stock returns in the GCC region, it is essential to tackle methodological issues including potential endogeneity, unobserved heterogeneity, and dynamic interrelationships among variables [8]. Panel Generalized Method of Moments (GMM) regression is particularly appropriate for this objective since it adeptly addresses endogeneity by employing instruments based on lagged values of the regressors [9]. Furthermore, the dynamic panel framework of the GMM estimator facilitates the incorporation of lagged dependent variables, thereby capturing the persistence of stock returns over time. In contrast to traditional techniques like Pooled OLS, Fixed Effects, or Random Effects models, panel GMM offers more reliable and consistent results when faced with autocorrelation and heteroskedasticity, making it the favored method for this empirical analysis.

The structure of this paper includes several sections: Section 2 of the paper highlights the selected literature review. Section 3 provides the methodology used and explains the model development. Section 4 discusses and analyzes the results, while Section 5 provides the conclusion.

2. Literature Review

2.1. Theoretical Background

This section aims to establish the theoretical framework for comprehending the impact of climate change commitment on stock returns within the GCC area. This research is based on two complementing theories: Stakeholder Theory and Signaling Theory. Stakeholder Theory underscores a firm’s obligation to a diverse array of stakeholders, extending beyond shareholders to encompass consumers, employees, communities, and the environment. This theory posits that, in the context of climate change commitment, corporations exhibiting environmentally responsible behavior are reacting to the expectations of many stakeholders. Such activities can elevate business reputation, fortify stakeholder relationships, and eventually promote firm performance, potentially manifesting in stock returns [10]. In addition, Signaling Theory asserts that enterprises communicate signals to the market to mitigate information asymmetry between management and investors. Climate change initiatives and environmental disclosures act as reliable indicators of a firm’s long-term focus, risk management abilities, and adherence to sustainable development objectives. Within the GCC framework, where environmental openness is still developing, companies that actively declare climate-related pledges may be regarded as more responsible and resilient, thereby garnering investor attention and impacting their stock performance [11]. Collectively, these ideas offer a comprehensive framework for examining the connection between environmental commitment and stock performance. Stakeholder Theory emphasizes the firm’s motives and obligations, whereas Signaling Theory elucidates how these activities affect investor views and market dynamics.

2.1.1. Stakeholder Theory

Stakeholder Theory, defined by Freeman [12], asserts that a firm’s long-term success and value are influenced not only by its shareholders but also by its capacity to fulfill the expectations of a wider array of stakeholders. These encompass customers, governments, suppliers, employees, communities, and the environment. This theory theorizes that corporations are not standalone economic entities but are integrated into a network of interactions, necessitating that choices account for the interests and welfare of all stakeholders [13]. By tackling social and environmental issues, especially climate change, a company bolsters its legitimacy, fosters trust, and mitigates possible disputes with diverse stakeholder groups, thus enhancing performance and value creation [14]. In the GCC region, whose economies predominantly depend on fossil fuels yet are progressively urged to embrace sustainable growth, climate change pledges have gained strategic importance. Organizations that aggressively address stakeholder demands, by establishing net-zero objectives, investing in renewable energy, and enhancing environmental transparency, are likely to receive greater backing from institutional investors and global collaborators. Such steps can bolster a firm’s brand, mitigate regulatory and transition concerns, and augment market confidence, all of which positively affect stock returns [15]. Furthermore, as GCC markets increasingly integrate with global capital flows and ESG investing trends gather momentum, companies with strong climate policies may draw greater investment, incur reduced capital costs, and achieve more resilient financial performance. Consequently, stakeholder-focused climate initiatives are increasingly regarded as a driver for stock return stability and growth in the region [16].

2.1.2. Signaling Theory

Signaling Theory, proposed by Spence [17], suggests that when information asymmetry exists between organizations and investors, corporations can communicate credible information regarding their quality or future potential through observable signals. For these signals to be successful and credible, they must be expensive or challenging for low-quality enterprises to replicate [18]. In the world of corporate conduct, acts like sustainability efforts, strategic disclosures, or voluntary environmental commitments work as indicators for the market, reflecting the firm’s robustness, risk management capabilities, and progressive strategy. Investors analyze these signals to enhance their decision-making, modifying their valuation of the company accordingly.

In the Gulf Cooperation Council (GCC) nations, where markets are swiftly advancing and ESG frameworks are attracting regulatory and investor focus, companies’ climate change commitments can act as significant indicators of corporate responsibility, adaptability, and long-term vision [19]. When a company voluntarily establishes carbon reduction targets, disseminates comprehensive climate risk reports, or invests in renewable energy, it conveys a robust message to the market on its readiness for the global energy transition and its conformity with evolving legislative trends. These climate initiatives may signify less environmental risk exposure and enhanced management quality [20]. Consequently, investors may react favorably by augmenting demand for the company’s stock, resulting in improved stock returns. This is especially pertinent in the GCC, where establishing a distinction via sustainable leadership is increasingly a competitive advantage in attracting both regional and global investment [21].

2.2. Previous Studies and Hypothesis Development

Climate Change Commitment and Stock Returns

Investment decisions are required to account for climate risk as a result of climate change policies designed to reduce energy use. Recent studies, such as those by Krueger et al. [22] and Bolton and Kacperczyk [23], indicate that investors recognize climate risk and require elevated returns from enterprises with greater pollution levels. Furthermore, environmentally aware enterprises incur lower financing costs than those lacking a greenhouse gas declaration [24]. For example, Antoniuk and Leirvik [19] determined that stockholders possessing shares with elevated climate risks ought to receive compensation. They examined the impact of the Paris Agreement, revealing that climate change events enhance the clean energy sector by increasing awareness among nations and facilitating the enactment of climate-friendly policies.

Shareholders are increasingly prioritizing climate issues and pursuing long-term investments in companies with reduced carbon emissions. The increase in climate consciousness enhances the value of green shares and diminishes the value of enterprises with elevated carbon emissions [25]. In addition, global corporations have acknowledged the economic advantages of confronting climate change and socioeconomic and environmental issues [26].

Once believed optional, environmental concern has progressively become indispensable for businesses in multiple aspects. Researchers have discovered that investors penalize companies that neglect to prioritize climate change mitigation, favoring businesses with low carbon emissions [23,27]. Conversely, certain studies indicate that investors could harbor a negative perception of environmental responsibility owing to heightened regulatory expenses [21]. Berkman et al. [21] analyzed the impact of climate change legislation on the valuation of U.S. and international firms, emphasizing the influence of investor perceptions. A company’s dedication to environmental sustainability may increase regulatory expenses, especially for entities vulnerable to significant climate risk [28]. The research additionally assessed the influence of 75 environmental policy announcements for equity portfolios in the UK, indicating that stock returns were influenced by nuclear, international, and domestic declarations. Notably, the implementation of environmental regulations in the UK did not substantially impact the performance of the electrical industry, a primary contributor to pollution. Nonetheless, S&P 500 energy-related firms experienced undervaluation because of climate change news events [20].

Moreover, Han et al. [29] illustrated that Australia’s carbon pricing strategy adversely impacted industries dependent on carbon-intensive activities, notwithstanding favorable government assessments. Rogova and Aprelkova [30] assessed the impact of IPCC pronouncements on publicly traded corporations within the United Nations (UN) and discovered that companies, irrespective of their carbon footprint, exhibited abnormal performance. Furthermore, Antoniuk and Leirvik [19] examined the effects of four disasters on exchange-traded funds (ETFs) centered on clean energy or fossil fuel sectors, emphasizing the swift market reaction to information regarding climate change. Furthermore, Tian et al. [16] focused on heavily polluting organizations and the influence of 270 Central Government Environmental Inspections on their stock values. Although these inspections resulted in significant stock drops for many companies, those with robust political affiliations faced fewer limitations, especially state-owned enterprises. Also, Zeng et al. [31] substantiated these findings, highlighting the negative impact of Central Environmental Protection Inspections on the stock returns of Chinese A-listed enterprises, which saw predominantly negative abnormal returns (ARs) due to heightened pressure from these entities.

On the other hand, investor confidence, characterized as a desire to invest influenced by perceived risks and returns, is pivotal in investment decisions [32]. The primary components of investor confidence are the perception of risk and return associated with a specific security, as well as the belief that their interests are sufficiently safeguarded against exploitation by issuers and counterparties. The contribution of sales experts disseminating company information may constitute one of the primary sources of investors’ rates of return [33]. Most studies have found that analysts may not be accountable for an equitable assessment of climate hazards at the company level. This reality may hinder investors from conducting a precise ex ante assessment of the risk of their portfolios, especially regarding physical danger.

On the contrary, Addoum et al. [34] revealed that certain sell-side analysts incorporate the impact of severe temperatures into their quarterly estimates in the United States. However, a global sample indicated that the opposite is true. Pankratz et al. [35] discovered that an increase in profit declines across enterprises attributable to severe temperatures was consistently accompanied by adverse performance analyst shocks. Prior to acknowledging investors’ responses to such events, it is essential to understand their processing of climate-related information [36]. Investor surveys offer persuasive evidence regarding this matter. The Certified Financial Industry Expert Institute reports that 60% of portfolio managers neglect to factor in climate change risks during their evaluations [37]. The principal challenges for investors are insufficient comprehension of climate change integration within investment strategies and a scarcity of resources. Bouchet et al. [38] reported a complete lack of disclosures from corporations, hindering investors from creating suitable measurement tools; similar findings were seen by Amel-Zadeh [39]. Consequently, investors continue to devise ways to address these repercussions [22]. Notwithstanding these apprehensions, investor evaluations indicate that, in contemporary times, investors have actively engaged with companies to address the climate change risks associated with their portfolio management [36].

Recent research studies have enhanced our comprehension of the impact of uncertainty on financial markets; yet, significant gaps persist that warrant the originality of our research. Arouri et al. [40] investigated the impact of climate policy uncertainty (CPU) on the responsiveness of GCC stock markets to fluctuations in oil prices, concluding that CPU adversely influences the correlation between previous oil prices and stock returns. In addition, Alqahtani et al. [41] assessed the predictive capability of global and Saudi geopolitical risk indices, together with crude oil returns, on GCC stock returns through in-sample and out-of-sample forecasting models. Despite its methodological rigor, their study revealed poor predictive utility for the majority of GCC countries and neglected environmental or sustainability-related threats.

Despite increasing interest in the connection between environmental performance and financial results, the literature examining the commitment to addressing climate change and its direct effect on stock returns in the GCC region is significantly limited. Most current research has focused on developed markets with established environmental regulations, resulting in a notable deficiency in comprehension regarding the dynamics in emerging markets such as the Gulf Cooperation Council, where regulatory frameworks and investor awareness of sustainability are still in development. Moreover, although previous research has frequently examined general ESG metrics, limited studies have specifically identified climate change commitment as a factor of stock return behavior. This study aims to address this gap by concentrating specifically on the GCC context, providing insights into the pricing of climate-related strategies in the stock market, and examining whether firms’ proactive environmental initiatives yield measurable financial value in a region that is significantly susceptible to climate risks while remaining heavily reliant on fossil fuels.

Based on the previous studies, this paper develops the following hypotheses:

H1. 

There is an impact of climate change commitment on stock returns.

H2. 

The investor reaction to climate efforts is reflected in stock performance in the GCC region.

3. Methodology

3.1. Sample Used

This paper investigates the impact of climate change commitment on the stock returns in the Gulf Cooperation Council (GCC) region. Specifically, data were collected for Bahrain, Kuwait, the United Arab Emirates, Qatar, Oman, and Saudi Arabia. Data for all non-financial listed companies in the respective markets were collected during the period of 2010 to 2023. The estimation technique used to analyze the results was panel GMM regression. Data were collected from the Refinitiv Eikon platform (LSEG), and any missing data were collected either from annual reports published for the non-financial companies or the stock market related to the required company. Additionally, all data processing and empirical analyses were performed utilizing STATA 17 software, facilitating efficient data management, statistical testing, and model estimation. This improved the clarity and replicability of the research results.

As shown in

Table 1. Sampling procedure.

Sampling Procedure	Description	Total Population	Sample Size
1.	All listed non-financial companies in GCC region	619	-
2.	Data availability consideration	-	285
3.	Selection of non-financial companies with data	-	285
4.	Period covered	-	2010–2023
GCC
Country	Population	Final Sample
Qatar	34	20
United Arab Emirates	85	37
Saudi Arabia	313	151
Bahrain	20	7
Kuwait	89	41
Oman	78	29
Total	619	285

, the overall sample decreased from 619 to 285 enterprises due to the lack of complete data for the remaining 334 firms, specifically for climate-related disclosures and essential financial metrics. To preserve data integrity and prevent the introduction of estimation errors, we refrained from utilizing interpolation or imputation techniques. We chose a listwise deletion method, preserving those firms with comprehensive annual data for all relevant variables. We recognize the possibility of selection bias, as excluded enterprises may differ systematically—such as being smaller, operating in less regulated industries, or lacking official climate pledges.

3.2. Model Development

3.2.1. Dependent Variable: Stock Returns

Stock return refers to the profit or loss produced by investing in a specific stock over a specific time period. Returns are usually calculated as the percentage change in the value of the stock over a given time, taking into account both capital gains (increase in value) and dividend payments [42]. Stock returns can be positive or negative, based on the fluctuations in stock prices and the number of dividends paid throughout the investment period. A company’s financial performance (such as revenue growth, profitability, and earnings) as well as the performance of the industry (i.e., sector) can also have an impact on its stock returns. Companies in a booming industry may have higher stock returns than companies in a declining industry since booming industries attract more investors and customers, resulting in increased demand for the products and services [43]. Companies in declining sectors, on the other hand, may face obstacles such as reduced product demand, increasing competition, and lower earnings. Stock returns are therefore an essential metric of stock performance because they can provide insights into the underlying financial health and development prospects of the company, allowing investors to make more informed choices regarding investments [44].

3.2.2. Independent Variables

Climate Change Commitment (ClCC)

The connection between climate change commitment and stock returns in the GCC region is garnering heightened interest as environmental sustainability emerges as a strategic priority [45]. Companies that actively engage in climate change mitigation, via carbon reduction strategies, investments in renewable energy, or honest ESG reporting, are frequently regarded as progressive and more equipped for impending legislative changes [38]. This proactive approach can elevate corporate reputation, draw long-term institutional investors, and bolster stakeholder trust, all of which may positively influence stock performance. Furthermore, as global investors and sovereign wealth funds in the region progressively incorporate ESG factors into their investment strategies, enterprises with robust climate-related disclosures and action plans may experience enhanced capital inflows and valuation premiums [26]. The financial impact may differ based on the industry’s sensitivity to environmental concerns and the development of climate policy in each GCC nation. Although the initial expenses of adopting green practices may adversely affect profitability, the long-term advantages, such as enhanced operational efficiencies, risk reduction, and access to sustainable financing, can bolster stock returns [29]. In the GCC, a company’s commitment to addressing climate change is increasingly seen as both a moral imperative and a strategic financial difference that affects investor sentiment and market performance.

In addition, this study evaluates corporations’ dedication to addressing climate change by employing both the overall ESG score and the Environmental score, both providing unique yet complementary perspectives. The ESG score, reflecting a company’s performance in environmental, social, and governance aspects, acts as a comprehensive indicator of corporate sustainability strategy and long-term stakeholder alignment. Firms really dedicated to combating climate change usually integrate these initiatives inside a comprehensive ESG framework, encompassing governance structures, transparency, and stakeholder involvement; thus, the ESG score signifies the institutionalization of these commitments [46]. Conversely, the Environmental score provides a focused assessment, directly measuring a company’s performance regarding carbon emissions, energy consumption, resource management, and environmental innovation. This score facilitates a concentrated evaluation of climate-related actions and disclosures, rendering it particularly pertinent when the analysis directly addresses environmental and climate policy alignment [47]. Collectively, these criteria encompass the strategic scope and environmental significance of a firm’s dedication to addressing climate change.

3.2.3. Control Variables (Firm Characteristics)

Profitability (Return on Assets)

Profitability serves as an indicator of a company’s financial health and is one of the key factors that can be used to forecast the anticipated stock prices [5]. A variety of financial measures can be utilized to determine profitability. This paper focuses on the return on assets ratio, which depicts how efficiently an organization’s assets are being utilized to generate profits. Return on assets can be calculated by dividing the firm’s net income by its total assets [48]. Increased profitability may result in increased stock returns for various reasons; when a company reports higher-than-expected earnings, investors become more optimistic about the company’s prospects, which leads to increased demand for the company’s shares and an increase in the stock price. Highly profitable companies may also choose to distribute a portion of their profits to shareholders in the form of dividends or share buybacks, which can boost demand for the stock and drive up its price. Lastly, higher profits can provide a company with more capital to invest in growth opportunities, which can lead to higher earnings and stock price appreciation. Overall, an increase in profitability can signal to investors that a company is growing and performing well, which can lead to increased confidence in the company’s prospects and higher demand for its shares, thus driving up stock returns [4]. According to Sitohang et al. [48], stock returns are positively correlated to return on assets because the higher the return on assets, the higher the stock returns. Similarly, Ramadhani and Ratnasari [49] found that there is a positive and strong correlation between stock returns and profitability, as indicated by return on assets.

Leverage (Debt-to-Equity Ratio)

The debt-to-equity ratio of a company can influence its financial stability and profitability, which in turn influences its stock price. This ratio can be used to determine stock returns. It measures a company’s debt dependency or obligations to finance its operations. It is determined by comparing the amount of debt with the amount of the company’s equity [50]. When a company has a high debt-to-equity ratio, it can pose a greater financial risk and limit its capacity to generate earnings, which may ultimately result in a drop in its stock value and reduced returns. Moreover, a low debt-to-equity ratio may enhance the financial security and earnings prospects of the company, thus increasing its stock value and greater investment returns. The debt-to-equity ratio can be calculated by dividing a company’s total debt by its total shareholders’ equity [51]. Sari and Hutagaol [52] examined the debt-to-equity ratio’s correlation with stock returns. The findings concluded that the debt-to-equity ratio signifies a positive correlation with stock returns. Similarly, Sayedy and Ghazali [53] reported that the debt-to-equity ratio had a significant effect on stock returns. Additionally, Hertina and Wardani [2] reported a positive correlation of the debt-to-equity ratio with stock returns. Their study claimed that the market reacts favorably to a rise in a company’s leverage.

Growth (Price-to-Book Ratio)

The growth of a company can be measured using the price-to-book ratio, which is another independent variable commonly used in finance and accounting research. Divide the market price per share by the book value per share, which is the sum of the company’s net asset value and the number of outstanding shares, to obtain a company’s price-to-book ratio [3]. The price-to-book ratio is a measure of how much more or less than the company’s book value the market believes its assets are worth. The growth factor represents a company’s predicted future growth in earnings and cash flows. This is based on the premise that companies with high growth rates have a larger potential for future profits, whereas companies with low growth rates may be less desirable to investors as companies with greater potential for growth are more likely to deliver better returns [54]. Yet, there may be a threshold effect in which extremely high price-to-book ratios reflect overvaluation and reduced returns. Furthermore, the relationship may differ among industries and market conditions, and it may be influenced by other factors such as interest rates and inflation. A low price-to-book ratio (less than 1) suggests that the market values the company’s assets less than their book value, indicating that the company may be undervalued, whereas a high price-to-book ratio (greater than 1) suggests that the market values the company’s assets more than their book value, indicating that the company may be overvalued [3]. Several studies have investigated the relationship between the price-to-book ratio and stock returns, with mixed results. Some studies suggest that companies with low price-to-book ratios tend to outperform those with high price-to-book ratios, as they are undervalued and have greater potential for future growth [54]. Other studies suggest that high price-to-book ratio companies may also outperform, as they have higher growth potential and are more likely to innovate and create new value [55]. However, there may be a threshold effect where extremely high price-to-book ratios indicate overvaluation and lead to lower returns.

Size (Natural Logarithm of Total Assets)

The natural logarithm of total assets is an independent variable commonly used in finance and accounting research to measure the size of a company or organization. It reflects the magnitude of a company’s operations and financial resources, which can be determined by factors such as yearly sales or revenue, number of employees, industry, and market capitalization [56]. The larger the size of a company, the more resources it has to support its business activities and generate revenue. The better the revenue, the more projects the company will be able to undertake. This will affect the demand for the company’s stocks positively. The higher the demand, the higher the stock price. Several studies have investigated the relationship between firm size and stock returns, with mixed results. Some studies suggest that larger companies tend to have lower risk and higher returns due to economies of scale, diversification, and greater access to capital markets [54]. Other studies suggest that smaller companies may provide higher returns than larger companies due to their higher growth potential and ability to adapt to changing market conditions [57,58]. Moreover, Ernawati and Herlambang [59] concluded that size has a significant and positive impact on stock returns. However, there may be a diminishing marginal effect of size, as extremely large companies may become too complex and less efficient in their operations, leading to lower returns.

3.2.4. Control Variables (Macroeconomic Variables)

Gross Domestic Product (GDP)

The association between gross domestic product (GDP) and stock returns is a crucial principle in financial economics, connecting the performance of the real economy with capital markets. Typically, GDP growth signifies an augmentation in economic activity, encompassing heightened consumer expenditure, business investment, and total corporation profitability [60]. During economic expansion, when companies achieve increased sales and profits, investors foresee improved earnings potential and are more willing to invest in shares, resulting in elevated stock prices and, therefore, enhanced stock returns. This link is not strictly linear or immediate, as stock markets are anticipatory and frequently react more to projections of future GDP performance than to current data [61]. If substantial GDP growth is anticipated to decelerate soon, markets may respond adversely despite good current data. Furthermore, fast GDP expansion may compel central banks to constrict monetary policy through elevated interest rates, thereby suppressing market sentiment and adversely impacting equity prices. Consequently, the impact of GDP on stock returns is mediated by monetary policy and investor mood [24]. Empirical studies indicate a moderate long-term association between GDP growth and stock returns; however, this relationship is less constant in the short term due to market volatility, policy alterations, and external shocks. This underscores the intricacy of the economic–financial market interplay, wherein robust economic fundamentals often bolster equity markets, but the timing and extent of the impact are contingent upon a wider array of expectations and conditions [62].

Inflation (Inf)

The association between inflation and stock returns is intricate and frequently affected by multiple macroeconomic and market-specific variables. Moderate inflation, in theory, might indicate economic growth and may be neutral or marginally beneficial for stock returns since businesses are able to transfer rising costs to consumers [32]. Nevertheless, significant or unforeseen inflation typically adversely impacts stock returns. Rising inflation diminishes the actual value of future corporate earnings and frequently prompts central banks to elevate interest rates, thus increasing the cost of capital and potentially hindering economic growth. Moreover, inflation engenders uncertainty within the investment landscape, resulting in diminished investor confidence and elevated risk premiums [63]. Companies with inflexible pricing power or elevated input prices may experience compressed profit margins during inflationary periods, adversely affecting stock performance. In emerging markets or inflation-sensitive industries like consumer goods and manufacturing, the negative impacts can be even more acute. In contrast, certain sectors such as energy or commodities may gain from inflationary pressures [27]. In summary, although equities are sometimes regarded as a long-term buffer against inflation due to their growth potential, high inflation generally presents obstacles for stock returns in the short term by influencing both firm fundamentals and investor behavior. The following

Table 2. Summary of variable measurements.

Variable	Abbreviation		Measurement	References	Source
Dependent Variable
Stock Return	SR		[Net income/total equity]	[64,65]	Refinitiv
Independent Variable
Climate Change Commitment		ClCC	A dummy variable (1 if the company reported a climate change commitment and 0 otherwise).	[63]	Refinitiv
		ESG	ESG score	[8]	Refinitiv
		E	Environmental score	[46]	Refinitiv
Control Variables (Firm Characteristics)
Profitability		Prof	Net income divided by total assets	[47]	Refinitiv
Leverage		Lev	Total liabilities divided by total equity	[66]	Refinitiv
Growth		Growth	Price per share/book per share	[67]	Refinitiv
Firm Size		FSize	Natural log of total assets	[68]	Refinitiv
Control Variables (Macroeconomic Variables)
GDP		GDP	The growth in annual GDP	[69]	World Bank Open Data
Inflation		Inf	The change in annual CPI	[70]	World Bank Open Data
Authors Analysis

provides the summary of measurements for all variables included in the model.

3.3. Model

Based on the previous section, the following panel GMM regressions were developed to help achieve the objective of the paper, which is to investigate the impact of climate change commitment on the stock returns in the GCC region.

SR_i,t = α₀ + α₁ SR_i,t−1 + α₂ ClCC_i,t + α₃ Prof_i,t + α₄ Lev_i,t + α₅ Growth_i,t + α₆ FSize_i,t + α₇ GDP_t + α₈ Inf_t + e

(1)

SR_i,t = α₀ + α₁ SR_i,t−1 + α₂ ESG_i,t + α₃ Prof_i,t + α₄ Lev_i,t + α₅ Growth_i,t + α₆ FSize_i,t + α₇ GDP_t + α₈ Inf_t + e

(2)

SR_i,t = α₀ + α₁ SR_i,t−1 + α₂ E_i,t + α₃ Prof_i,t + α₄ Lev_i,t + α₅ Growth_i,t + α₆ FSize_i,t + α₇ GDP_t + α₈ Inf_t + e

(3)

where the following definitions hold:

SR stands for stock returns and is measured by the difference in stock prices over the original price.

ClCC stands for climate change commitment and is measured by a dummy variable.

ESG stands for Environmental, Social, and Governance score.

E stands for Environmental score.

Prof stands for profitability and is measured by return on assets.

Lev stands for leverage, measured by the debt-to-equity ratio.

Growth stands for growth and is measured by the price-to-book ratio.

FSize stands for the firm size and is measured by the natural logarithm of total assets.

GDP stands for gross domestic product and is measured by the growth in gross domestic product.

Inf stands for inflation and is measured by the growth in the consumer price index.

e = error term.

4. Results and Analysis

4.1. Descriptive Statistics

Table 3. Descriptive statistics.

Statistics	SR	ClCC	Prof	Lev	Growth	FSize	GDP	Inf
Mean	0.105	0.561	0.041	0.699	1.284	20.212	0.031	0.017
St. Dev.	0.749	0.021	0.325	1.946	2.173	1.384	0.042	0.012
Min.	−0.543	0	−3.582	0.000	0.000	14.749	−0.053	−0.025
Max.	3.787	1	0.921	0.953	7.475	26.594	0.192	0.058

below highlights the descriptive statistics, emphasizing the substantial diversity in the characteristics of non-financial companies in the Gulf region. It highlights the need for investors to meticulously evaluate each company’s size, growth, leverage, profitability, and stock return to make a sound decision. The high standard deviation of all the following variables stresses the need for stakeholders to undertake a comprehensive analysis of the firms to ensure a well-informed investment decision. When observing non-financial companies in the GCC region, we can deduce that they have a mean profitability of 0.041, suggesting that, on average, non-financial firms in the GCC are making a low profit of 4.1 percent.

Additionally, the mean leverage of 0.699 suggests that, on average, non-financial firms in the Gulf region have a high level of debt compared to their assets. The standard deviation of 1.946 is relatively high, implying a high level of variation in the leverage of non-financial companies across the GCC region. However, Table 3 states that, on average, firms in the GCC are experiencing positive growth, at an average rate of 1.284 with the highest standard deviation of 2.173; this result implies that investors need to attentively and thoroughly assess each company’s prospects when it comes to their growth, as well as assessing how capable the company will be in maintaining their growth rate in the future, before making an investment decision. The mean stock return of 0.105 suggests a positive average return on investment, while the standard deviation of stock returns is 0.749, indicating the need for investors and other concerned stakeholders to fully evaluate a company’s historical and expected future returns before making any decisions. Lastly, the standard deviation of 1.384 for firm size implies that, just like growth and leverage, there is a high level of variation in company size across GCC, with some non-financial companies being smaller and others being much larger, which is to be expected.

4.2. Correlation Matrix

As shown in

Table 4. Correlation matrix.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
(1) SR	1
(2) ClCC	0.025	1
(3) Prof	0.084	0.041	1
(4) Lev	−0.039	0.032	−0.074	1
(5) Growth	0.194	0.052	0.090	0.071	1
(6) FSize	0.094	0.068	0.077	0.0062	−0.032	1
(7) GDP	−0.039	0.028	0.032	0.017	0.052	0.107	1
(8) Inf	0.084	0.019	0.027	0.011	0.173	−0.030	−0.075	1

, the correlation between stock returns and growth is positive (0.194). This indicates that firms experiencing higher growth also tend to have greater stock returns, thus implying that growth is a relatively significant predictor of stock returns. Consistent with the study of Doblas et al. [3], investors are typically drawn more to firms that exhibit signs of strong growth prospects. This is because higher growth prospects imply that a company has the capability to increase its revenue and generate greater stock returns through increased dividends.

Also, leverage displays a negative correlation, which is −0.039. This figure signifies that as leverage increases, returns also decrease. Zhang and Zhou [71] found that highly leveraged firms are more vulnerable to bankruptcy and financial risk as they are required to make incremental and timely interest payments, as well as repay the capital at maturity. This could make the firm’s stock returns more volatile, which could ultimately reduce investors’ returns. Investors should take this information into account before making any related investment decisions. A correlation of 0.084 exists between profitability and stock returns, which implies a positive relationship, Hence, when the profitability of Gulf companies increases, there will also be a corresponding increase in the stock returns. Budi and Davianti [72] argue that profitable companies may have greater prospects for growth because they have more capital to spend on new initiatives and expanding their business. This may boost the firm’s future profitability and attract investors to buy their stocks, which could raise stock returns.

4.3. Panel GMM Regression Results

The following

Table 5. Panel GMM regression results.

Dependent Variable: SR
Variables	Model 1	Model 2	Model 3
Lag SR	0.019 ***	0.021 ***	0.020 ***
ClCC	0.066 ***
ESG		0.058 ***
E			0.082 ***
Prof	0.185 **	0.215 ***	0.162 ***
Lev	−0.049 **	−0.032 **	−0.058 **
Growth	0.037 **	0.041 **	0.051 **
FSiz	0.129 ***	0.110 ***	0.152 ***
GDP	0.184	0.210	0.362
Inf	0.259	0.152	0.228
Constant	0.360 ***	0.451 ***	0.236 ***
Hansen Test	0.415	0.369	0.428
AR (1)	0.296	0.263	0.207
AR (2)	0.367	0.211	0.285
Wald Chi2	699.274 (0.000)	752.221 (0.000)	716.259 (0.000)

***, ** are the statistical significance levels at 0.01, and 0.05 respectively.

displays the results of panel GMM regression results. This study’s findings indicate a positive and statistically significant association between climate change commitment and stock returns for non-financial enterprises in the GCC region. This research indicates that firms that actively participate in environmental sustainability efforts, such as minimizing greenhouse gas emissions, augmenting climate-related disclosures, and investing in green technologies, generally achieve better stock market success. Investors may perceive these pledges as signs of strategic foresight, effective risk management, and conformity with global sustainability trends, consequently granting these enterprises elevated valuations and enhanced profits. The beneficial influence is especially pertinent in the GCC setting, where governments are progressively emphasizing climate action and sustainable development, rendering environmentally dedicated enterprises more appealing to both regional and worldwide investors. This research reinforces the increasing conviction that climate-related business responsibility can generate financial value, especially in historically resource-dependent economies.

Additionally, Models 2 and 3 act as robustness tests by integrating more extensive metrics of environmental responsibility. By substituting the original climate change commitment dummy variable with the ESG score and subsequently the Environmental score from Refinitiv Eikon, we validate the consistency and reproducibility of our findings across various yet interconnected dimensions. Our investigation utilized both the ESG score and the Environmental score as indicators of corporations’ dedication to addressing climate change, revealing a statistically positive and significant effect on stock returns in both instances. This detection verifies the idea that markets incentivize companies exhibiting superior sustainability practices, whether assessed via a comprehensive ESG framework or a more focused environmental perspective. The uniformity of findings across all metrics indicates that investors regard climate-conscious behavior, whether incorporated into general governance or particularly targeting environmental performance, as a value-enhancing characteristic. A probable rationale for this is that companies with elevated ESG or Environmental ratings are more adept at managing regulatory risks, securing long-term funding, and proactively addressing stakeholder expectations, hence enhancing investor trust and market valuation.

We recommend that investors incorporate ESG and Environmental scores into their screening and portfolio allocation strategies by setting minimum threshold levels, such as selecting firms with an ESG score above the 50th percentile or an Environmental score surpassing the median among their industry counterparts. These thresholds can function as effective benchmarks for identifying companies with genuine climate pledges that are expected to yield greater long-term returns. Moreover, authorities and financial institutions might integrate these measures into sustainable finance frameworks, promoting enhanced transparency and climate-related disclosures.

Profitability plays a crucial role in driving up stock returns, as it is positively correlated and significant at 1%. According to Sugito et al. [4], when a firm yields higher profitability, investors tend to believe the firm is operating well and displays promising prospects. This promotes confidence in the company and, as a result, leads to greater demand for its shares, thereby pushing up stock returns. Similarly, Nadyayani and Suarjaya [73] argue that high profitability is perceived as stability and security by investors, leading to higher valuations and stock prices. This confidence and positive sentiment towards profitable companies can result in higher returns for investors. Therefore, profitability is a strong indicator for investors to consider when purchasing a company’s shares, as it has a significant positive impact on stock returns [74]. In the context of highly profitable non-financial companies in the GCC, investors tend to buy their shares, which drives up the stock prices and generates positive returns.

Moreover, leverage has a negative yet significant impact on stock returns at 1%. Thus, our results suggest that in the GCC countries, highly leveraged companies tend to have lower stock returns. As a result, companies’ solvency levels may decrease with an increase in leverage, lowering investors’ confidence [75]. As a result, according to Ahmad et al. [76], to avoid potential risks, investors avoid these companies by selling their shares rather than buying them, thereby causing a decline in the companies’ returns. Additionally, firms with heightened debt levels are more exposed to financial risk and bankruptcy, which can lead to a decline in stock prices and lower returns for investors as high debt levels can reduce investor confidence [77].

In addition, as shown in Table 5, at 1 percent, stock returns are positively and significantly affected by growth, indicating that non-financial firms in the GCC with high growth prospects yield greater stock returns as well. An increase in growth indicates an increase in stock prices, which investors appreciate because there will be a market gain, which will have a beneficial influence on stock returns. This is consistent with the study of Srinivasan [78]. In addition, Yao et al. [79] claim that this significance may be due to increased demand; growth firms are often associated with high-growth-potential industries and are perceived as having better growth prospects, leading to increased demand for their shares and higher returns.

The results also highlighted that firm size is significant and positive (0.129), indicating that, in the Gulf region, larger non-financial companies typically have higher stock returns compared to smaller firms. Astakhov [80] claims that this may be due to several factors, such as higher competition which may lead to higher demand for shares, and this affects the share prices positively. Additionally, firms that are larger in size experience easy access to markets, and this provides flexible credit terms.

5. Robustness of Results

Table 6. Robustness of results (Panel GMM regression).

Dependent Variable: SR
Variables	Model 1	Model 2	Model 3
Lag SR	0.011 ***	0.018 ***	0.025 ***
ClCC	0.057 ***
ESG		0.045 ***
E			0.091 ***
Prof	0.129 **	0.200 ***	0.186 ***
Lev	−0.024 **	−0.041 **	−0.048 **
Growth	0.032 **	0.030 **	0.047 **
FSize	0.197 ***	0.082 ***	0.076 ***
GDP	0.366	0.442	0.398
Inf	0.174	0.199	0.263
Constant	0.411 ***	0.488 ***	0.365 ***
Hansen Test	0.362	0.307	0.465
AR (1)	0.195	0.223	0.287
AR (2)	0.241	0.222	0.290
Wald Chi2	554.979 (0.000)	635.141 (0.000)	672.227 (0.000)

***, ** are the statistical significance levels at 0.01, and 0.05 respectively.

provides the results of panel GMM regression with different measures taken for the selected variables. For example, instead of measuring the stock return as the change in price over the original price, this model applied the logarithm of stock return, the profitability measured as return on equity, leverage as total liabilities to total assets, firm size as the natural logarithm of market capitalization, and growth as the change in assets divided by the original total assets. In addition, the replacement of the climate change commitment (ClCC) variable with the ESG score and then the Environmental score aims to improve the comparability and empirical reliability of the analysis.

The ClCC dummy variable simply signifies the existence or non-existence of a climate-related commitment, hence oversimplifying the extensive range of corporate environmental endeavors and failing to reflect the intensity or quality of these activities. To address this constraint, we present the ESG score as a continuous and integrative indicator that incorporates a firm’s total performance in environmental, social, and governance aspects. This score, obtained via the Refinitiv Eikon platform (LSEG), is based on a standardized and reputable approach, offering reliable and comparable data among organizations. To concentrate primarily on climate and environmental issues, we employ the Environmental score, obtained from Refinitiv Eikon, which distinctly highlights the environmental aspect of sustainable activities. Substituting the binary ClCC variable with these dependable, continuous variables enhances this study by providing depth, variety, and comparability, thereby facilitating a more precise and nuanced assessment of the association between company environmental practices and financial or strategic results.

The variables incorporated in Model 2 and Model 3 (the ESG score and the Environmental score, respectively) produce substantial and consistent outcomes, hence enhancing the robustness of our findings. In contrast to the binary climate change commitment variable included in Model 1, these continuous indicators provide a more thorough and nuanced depiction of business environmental performance. The observation that both alternative variables yield statistically significant results consistent with our initial hypothesis indicates that our findings are robust to the choice of proxy employed. The uniformity among models substantiates the validity of the examined connection and offers compelling evidence that our conclusions remain robust across diverse specifications and measurement methodologies.

6. Implications

The findings indicate a positive and significant influence of climate change commitment on stock returns for non-financial enterprises in the GCC, leading to many implications for primary stakeholders. The findings indicate that integrating climate-related parameters into investment decisions can improve portfolio performance for investors. Firms that prioritize climate considerations seem to provide superior risk-adjusted returns, rendering them appealing prospects for sustainable and long-term investments. Investors may gain advantages by assessing companies’ climate plans and disclosures inside their financial analysis and asset allocation processes. The findings underscore the strategic significance of climate change programs for managers, not only for compliance or ethical considerations, but also for financial performance. Organizations that actively tackle environmental issues may enhance their reputation, mitigate regulatory and operational risks, and appeal to a wider pool of investors. Managers ought to incorporate sustainability into fundamental company strategies, enhance transparency in climate reporting, and match operations with global environmental norms. The findings emphasize the necessity for regulators and policymakers to formulate and implement laws that foster corporate environmental accountability. Regulatory frameworks promoting climate disclosures, emissions reduction, and green investments may facilitate the overarching economic and financial development objectives of the GCC. Moreover, implementing incentives for companies that engage in climate action could cultivate a more robust and competitive market. The results indicate that climate change commitment has transitioned from a peripheral concern to a fundamental element of corporate success and economic sustainability in the GCC area.

7. Limitations and Future Studies

This study, although providing significant insights into the beneficial effects of climate change commitment on stock returns in the GCC, has multiple limitations that require attention. The investigation is confined to non-financial enterprises, perhaps limiting the generalizability of the findings throughout the corporate sector. Financial institutions frequently operate under varying regulatory frameworks, risk profiles, and ESG reporting standards that may affect the dynamics of their relationships. This study concentrates solely on the GCC region, characterized by distinct economic structures and regulatory frameworks, mostly attributable to its reliance on oil and gas income. Consequently, the findings may not be universally relevant to other regions characterized by varying degrees of climate risk exposure or policy rigor. The analysis depends on current ESG scores and publicly accessible disclosures, which may exhibit inconsistencies or a deficiency in standardized reporting among firms. Subsequent studies may broaden the approach by integrating financial institutions, contrasting outcomes across regions (such as MENA or developing economies), or investigating sector-specific dynamics. Moreover, utilizing longitudinal designs and alternative methodologies, such as instrumental variable approaches or structural equation modeling, can reinforce causal linkages. Future research may also examine the influence of national climate policy, investor opinion, and board-level sustainability governance on business performance outcomes.

8. Conclusions

This empirical study aimed to identify and investigate the impact of climate change commitment and stock returns in the Gulf Cooperation Council (GCC) region, with a focus on non-financial companies, for the period 2010 to 2023. Specifically, Bahrain, Kuwait, Qatar, Saudi Arabia, Oman, and the United Arab Emirates were evaluated and provided a sample of 285 companies. This study aimed to contribute to the existing body of research in finance by providing evidence-based insights into the relationship between climate change commitment and stock returns in the GCC region. The methodology used for this study involved a quantitative analysis of secondary data sourced from Refinitiv Eikon, financial statements, and annual reports of non-financial companies listed on the stock exchanges of the GCC countries. This study employed panel GMM regression to examine the relationship between climate change commitment and stock returns and a range of control variables, firm characteristics (namely profitability, leverage, size, and growth), and macroeconomic variables (such as GDP and inflation). The interesting result is that the more committed companies are to addressing climate change, the better the stock returns are since investors take this as a sign of environmental concerns reported by the management. In addition, the results of this paper indicate that growth, size, and profitability have a significant and positive impact on stock returns, and leverage has a significant and negative impact. Accordingly, the greater the profitability, size, and growth opportunities, the higher the stock returns, while the higher the leverage, the lower the stock returns. These results suggest that such companies may be more inclined to seek additional funding from financial institutions to pursue potential growth opportunities. We recommend that investors use minimum thresholds for ESG and Environmental scores in their screening and portfolio allocation strategies, such as selecting firms with ESG scores above the 60th percentile or Environmental scores above the industry median. These levels can help identify corporations with genuine climate pledges that will generate higher long-term profitability. Authorities and financial institutions should also include these measures in sustainable finance frameworks to increase transparency and climate disclosures. Overall, this paper provides valuable insights into the impact of climate change commitment on stock returns, which can help investors make informed decisions about which companies to invest in and how to manage their portfolios to achieve higher returns. It is recommended that future studies consider additional variables to improve the explanatory power of the model and provide a more comprehensive understanding of the shaping of portfolios in the GCC region.