Are financial markets aligned with climate action? New evidence from the Paris Agreement
It is increasingly recognised that financial markets have a key role to play in meeting climate mitigation objectives. But are markets willing to direct more capital allocation towards such a low carbon pathway? This paper provides new evidence that financial markets value firms’ expansion into production of low carbon goods and services, but they remain cautious on divesting from the most polluting industries.
The authors exploit the Paris Agreement as an exogenous political shock that signalled increased global commitment on climate action. Using an event study approach, they examine the daily stock prices of major publicly listed US companies. The authors distinguish green and brown firms using their green revenue share and their carbon intensity respectively. They find evidence that the cumulative returns of stocks for firms were re-priced during the five days following the signing of the Paris Agreement. Cumulative returns were up to 10 per cent higher for green firms while the effect was less pronounced for brown firms and limited to firms active in oil and gas extraction. Overall, the results suggest that capital markets are responding to opportunities but less to risks in the low carbon economy.