Are Financial Markets Pricing Carbon Risks After the Paris Agreement? An Assessment of Low-Carbon and Carbon-Intensive Stock Market Indices
13 Pages Posted: 27 Dec 2018
Date Written: December 9, 2018
The transition to sustainable finance is crucial to scale-up low-carbon investments and achieve the 2C target. Nevertheless, most investors have not yet shifted their portfolios from carbon-intensive to low-carbon assets. One barrier is represented by the limited understanding of to what extent (if any) the market reacts to climate announcements by rewarding low-carbon assets and/or by penalizing carbon-intensive assets. So far, neither academics nor practitioners’ research provided conclusive evidence. We contribute to fill in this gap by developing an empirical analysis of the low-carbon and carbon-intensive indices at the EU, US and global stock markets levels, in terms of systematic risk (beta), before and after the Paris Agreement (PA). In particular, we test whether financial market reacted to the PA and favourably priced low-carbon indices afterwards (in terms of lower systematic risk), and/or whether the market penalized carbon-intensive indices after the PA. We find that the overall performance of the low-carbon indices has increased after the PA, with the level of systematic risk associated to the low-carbon equity significantly decreased in all stock markets considered. In contrast, we notice an increase of the overall systematic risk for most of the carbon-intensive indices considered. This evidence suggests that, after the PA, market participants perceive carbon-intensive assets as riskier and hence demand higher risk premia than before on the one hand, and, on the other hand, low-carbon assets as less risky and thus more appealing for investment opportunities.
Keywords: Financial Market, Asset Pricing, Paris Agreement, Low-Carbon Indices, Carbon-Intensive Indices, Systematic Risk, Beta
JEL Classification: C22, C58, Q54
Suggested Citation: Suggested Citation