Is the Stock Market Worried About Climate Change? Lessons from the 2010s

Abstract

On Christmas Eve 2019, the MIT Technology Review published an article entitled “The 2010s Were Another Lost Decade on Climate Change.” On New Year’s Day, the Washington Post published a longer article with the same title. Both pieces told basically the same story, one repeated by many environmentalists and climate experts: The failure to take meaningful action on climate change in the 2010s had dramatically exacerbated the problem. This article investigates how the stock market reacted to the negative climate-related news that emerged during the 2010s. The results suggest that at an aggregate level the stock market was unconcerned about the climate news, implying that the market believed that climate change would not have a major impact on future macroeconomic growth. There is evidence, however, that the market concluded that climate issues would be a significant problem for fossil fuel companies. TOPICS: ESG investing, Tail risks, financial crises and financial market history Key Findings ▪ According to many environmental experts, the 2010s were a lost decade for climate change, which foretold large future economic damages. This suggests that the 2010s should have been a bad decade for the stock market as it discounted the prospect of future climate-related costs. ▪ In fact, the decade of the 2010s was the second best in US history, surpassed only by the 1950s. The largest stock market drops that did occur during the decade were totally unrelated to climate news. ▪ Although the aggregate stock market was apparently unconcerned about climate change, climate worries did affect certain sectors. For instance, fossil fuel companies dramatically underperformed the overall market.