War and Policy: Investor Expectations on the Net-Zero Transition

Abstract

This study develops novel text-based proxies of corporate exposure to the low-carbon transition and applies them to study investor responses to major events. US stocks with greater regulatory transition risk outperformed in response to the Russia-Ukraine war, though firms with renewable energy opportunities also benefited temporarily. The US Inflation Reduction Act (IRA) also favored both types of firms, suggesting that the pricing of climate risk does not generally follow a one-dimensional “brown vs. green” framework. In Europe, if anything, high-transition risk firms suffered. These results indicate an international divergence in the pace of energy transition.

Keywords: Climate transition risk, energy, ESG, event study, inflation, Inflation Reduction Act, resilience, regulation, REPowerEU, Russia-Ukraine war, stock returns

JEL Classification: E3, G14, G01, Q54