Stock Market Reactions to International Climate Negotiations

Several studies have shown that investors take environmental regulation into account in their investment decisions. We investigate if international climate negotiations are an effective signal to decarbonize the economy. For that purpose, we analyze short-term market reactions to the outcomes of international climate negotiations, through an event study. We compare the stock price effects on the largest "green“ companies with the largest "brown“ companies globally. We find that international climate negotiations have a signaling effect on global financial markets. Before 2013, climate negotiations mainly had effects on "green“ companies. Only starting in 2013, but especially in 2015 (Paris Agreement), we can find negative effects on "brown“ companies. This indicates that the focus has shifted to the risks for brown companies. Although the Paris Agreement was considered a political milestone, it was less effective as an investment signal. A possible explanation is the mismatch between international targets and national policies.