Blind to carbon risk? An analysis of stock market reaction to the Paris Agreement
By I. Monasterolo, L. D. Angelis. Ecological Economics, 2020
286 citations recorded by the source corpus.
It is increasingly recognized that a transition to sustainable finance is crucial to scale up the low-carbon investments needed to achieve the global climate targets. A main barrier to portfolios' decarbonization is the lack of conclusive evidence on whether low-carbon investments add value to a portfolio, and on whether markets react to climate announcements by rewarding (penalizing) low-carbon (carbon-intensive) assets. To fill this gap, we develop an empirical analysis of the low-carbon and carbon-intensive indices for the EU, US and global stock markets. We test if financial markets are pricing the Paris Agreement (PA) by decreasing (increasing) the systematic risk and increasing (decreasing) the portfolio weights of low-carbon (carbon-intensive) indices afterwards. We find that after the PA the correlation among low-carbon and carbon-intensive indices drops. The overall systematic risk for the low-carbon indices decreases consistently, while stock markets' reaction is mild for most carbon-intensive indices. Moreover, the weight of the low-carbon indices within an optimal portfolio tends to increase after the PA. This evidence suggests that stock market investors have started to consider low-carbon assets as an appealing investment opportunity after the PA but have not penalized yet carbon-intensive assets.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/b3b4736f3f776581f3c2f2a69d982fc6ec96392a
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Citations in the corpus
- Inside the ESG Ratings: (Dis)Agreement and Performance (2020, unknown): “This is also consistent with the findings in Monasterolo and De Angelis (2020) where the green asset class shows a market exposition that is larger than the brown one.”
- Climate Change and the Financial System (2020, background): “Introduce forward-looking climate risks into financial risk metrics (such as the Climate Spread and the Climate VaR) used by private and public decision makers (Battiston et al., 2017, Monasterolo et al., 2018, Battiston and Monasterolo, 2019); 4.”