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. We exploit the Paris Agreement as an exogenous political shock that signalled increased global commitment on climate action. Using an event study approach, we examine the daily stock prices of major publicly listed US companies. We distinguish green and brown firms using their green revenue share and their carbon intensity respectively. We find evidence that the cumulative returns of stocks for firms are re-priced during the five days following the Paris Agreement. Cumulative returns are up to 10% higher for green firms while the effect is less pronounced for brown firms and limited to firms active in the oil and gas extraction. Overall, our results suggest that capital markets are responding to opportunities but less to risks in the low carbon economy.