Climate-Related Regulations and Financial Markets: A Meta-Analytic Literature Review

Abstract

Countries are confronting climate change using climate-related regulations that require firms and investors to disclose their green strategies and activities. Using the Meta-Analysis Structural Equation Modeling (MASEM) technique, this study evaluates the relationship between climate-related regulations and financial markets. The meta-regression analysis is conducted based on the outcomes of 52 empirical studies screened from 143 relevant articles. The results show the predictive power of the climate-related disclosure (CRD) laws and environmental regulations (ERs) on financial performance across all studies. ERs create mixed impacts on the equity market and support the debt market. Firm value is affected by ERs either negatively or positively. Methodologies and risk-related factors (market, industry, and firm risks) are important in explaining the relationships between ER/CRD and financial performance. The more developed the market, the less the impact of ERs and CRD on the equity market. Considering industry risk is recommended because different industries are exposed to changes in policies differently. The ER/CRD–firm value relationship is affected by all market, industry, and firm risks. The downside effect of mandatory CRD on the equity market suggests that policy makers, firms, and investors should be cautious in passing a new CRD regulation for transformation towards a sustainable economy.