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Over with carbon? Investors’ reaction to the Paris Agreement and the US withdrawal


Alessi, Lucia; Battiston, Stefano; Kvedaras, Virmantas (2024). Over with carbon? Investors’ reaction to the Paris Agreement and the US withdrawal. Journal of Financial Stability, 71:101232.

Abstract

How financial investors may react to policy events related to sustainability and climate change mitigation in particular, is a key question with implications for sustainable finance and financial stability. We address this question by carrying out a multi-period difference-in-difference approach on a confidential database of securities holdings of the European Central Bank, and we provide evidence of several effects related to the Paris Agreement. In aggregate, investors reduced their participation in the equities of high-carbon firms in response to the agreement, and the trend reverted after the US’s announcement of withdrawal from the agreement. However, the reaction varies across categories and geographies of the securities holders, their ownership size, and the emissions of owned firms. In particular, transition risk has been taken up by less regulated financial institutions and the BRIC countries. Our results highlight that the redirection of global financial flows towards climate action requires clear and unanimous signals from the global community of policy makers.

Abstract

How financial investors may react to policy events related to sustainability and climate change mitigation in particular, is a key question with implications for sustainable finance and financial stability. We address this question by carrying out a multi-period difference-in-difference approach on a confidential database of securities holdings of the European Central Bank, and we provide evidence of several effects related to the Paris Agreement. In aggregate, investors reduced their participation in the equities of high-carbon firms in response to the agreement, and the trend reverted after the US’s announcement of withdrawal from the agreement. However, the reaction varies across categories and geographies of the securities holders, their ownership size, and the emissions of owned firms. In particular, transition risk has been taken up by less regulated financial institutions and the BRIC countries. Our results highlight that the redirection of global financial flows towards climate action requires clear and unanimous signals from the global community of policy makers.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Finance
Social Sciences & Humanities > General Economics, Econometrics and Finance
Uncontrolled Keywords:Sustainable finance, Climate finance, Transition risk, Paris agreement, Securities holdings
Scope:Discipline-based scholarship (basic research)
Language:English
Date:April 2024
Deposited On:11 Mar 2024 10:18
Last Modified:30 Apr 2024 01:53
Publisher:Elsevier
ISSN:1572-3089
OA Status:Hybrid
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1016/j.jfs.2024.101232
Project Information:
  • : FunderEuropean Commission Joint Research Centre
  • : Grant ID
  • : Project Title
  • Content: Published Version
  • Language: English
  • Licence: Creative Commons: Attribution 4.0 International (CC BY 4.0)