Just blah blah blah? Stock market expectations and reactions to COP26

Applying an event study methodology, this research examines whether and how the stock market incorporated the key outcomes and statements from the COP26 summit into share prices. Our study is based on a sample of 7587 firms from four economic areas (EU, USA, China and India) belonging to the most carbon-intensive sectors. The empirical evidence shows that stock market reaction depends on how country authorities respond to commitments to accelerate and scale the transition to a greener economy, confirming that the stock market reacts negatively to stringent climate policies and positively to less stringent regulations. At the same time, in sectors emitting the most pollution, investors tend to reward companies with the best/worst environmental performance according to the type of climate policies adopted, more or less strict. Since finance is expected to play a critical role in the transition to a low-carbon economy, our results have relevant policy implications by highlighting that only clearly-defined, long-term and credible climate-related policies can lead equity investors to adequately consider environmental issues.

Automated summary

Using an event study methodology, this research investigates the stock market's response to the key outcomes and statements from the COP26 summit. The study focuses on 7587 companies from four major economic regions (EU, USA, China, and India) in carbon-intensive sectors. The empirical findings suggest that stock market reactions depend on how countries respond to commitments for a greener economy, with stricter climate policies leading to negative reactions and less stringent regulations resulting in positive reactions. Additionally, in heavily polluting sectors, investors tend to reward or punish companies based on their environmental performance and the type of climate policies adopted. These results highlight the importance of clearly-defined, long-term, and credible climate-related policies in driving equity investors to consider environmental issues.