A measure of climate change in financial news and its impact on the stock market

Abstract

As a fast-evolving form of sustainable investing, Environmental, Social, and Governance (ESG) strategies have attracted more and more investments. One of the central questions in this context is whether and to what extent climate change is ‘priced in’ by the market. In this paper, we give contributions that help answer this question and offer implications for market participants and policymakers. Firstly, we extract the climate dimension of financial news by introducing a measure to quantify it. Secondly, we perform a causality analysis of the linear and non-linear relationship between this quantified information and market data on over 3,000 stocks. Our empirical results show a causal relationship between the market and the climate information extracted from our representation learning methods. We also notice that the strength of this relationship decreases over time, indicating that the climate dimension contained in the news articles is quickly reflected in the market but its effects are gradually decreasing.