Blind to carbon risk? An analysis of stock market reaction to the Paris Agreement

Irene Monasterolo and Luca De Angelis

Ecological Economics, 2020, vol. 170, issue C

Abstract: 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.

Keywords: Asset pricing; Paris Agreement announcement; Low-carbon indices; Carbon-intensive indices; Systematic risk; Markowitz's portfolio optimization; Market model; Fama-French five-factor model; Risk-adjusted return; Stranded assets (search for similar items in EconPapers)
JEL-codes: C22 C58 Q54 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (107)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:170:y:2020:i:c:s0921800919309607

DOI: 10.1016/j.ecolecon.2019.106571

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