It is increasingly recognised that global financial markets have a key role to play in meeting climate mitigation objectives, by mobilising investments towards long term needs such as in low carbon innovation and infrastructure. But are markets willing to direct more capital allocation towards such a low carbon pathway? This paper provides new evidence that financial markets value firms' expansion into production of low carbon goods and services, but they remain cautious on divesting from the most polluting industries. Taking major publicly listed US companies as a sample, we construct portfolios of green and brown firms using a novel dataset recording firms' green revenue share for the former and carbon intensity data for the latter. We use an event study approach and the Paris Agreement as an exogenous shock, and find evidence that green firms' stocks are re-priced following positive political shocks that signal increased global commitment on climate action. Cumulative returns are up to 10% higher for the greenest firms during the five day period after the event. Negative effects for the most polluting firms are less pronounced and limited to oil and gas extraction firms. Overall, our results suggest that capital markets are responding to opportunities but less to risks in the low carbon economy.
