Research

This paper examines whether traditional monetary policy affects firms differently based on their carbon emissions—a previously unexplored driver of monetary policy non-neutrality. We develop a theoretical model predicting that carbon-intensive (brown) firms are more sensitive to monetary policy shocks due to investor preferences for ”green” assets. We test this prediction using stock price data from U.S. firms between 2010 and 2019. Our findings confirm that brown firms are more sensitive to monetary policy shocks than green firms. This heightened sensitivity persists even after controlling for financial constraints and intensifies with rising climate awareness among investors. Our results suggest that traditional monetary policy is not carbon-neutral and unintentionally amplifies biases related to carbon emissions, highlighting important considerations for policymakers. (Available here)

In this study, we investigate the influence of U.S. climate legislation on the relationship between carbon emissions of S&P 500 firms and their stock returns from 2010 to 2019. We use reported total carbon emissions as our primary measure for carbon transition risk and and rely on a novel public database on climate laws to construct a climate law index. Our findings primarily indicate that investors price carbon transition risk based on emission levels rather than emission intensity. Specifically, an increase of one standard deviation in total emissions is associated with a 2.8% decrease in stock returns. However, the persistent negative relationship between carbon emissions and stock returns post-climate law implementation is not evident. Further investigations show that high climate change awareness amplifies the negative effect on “brown” stocks post-climate law introduction, suggesting a shift in investor sentiment towards greater climate risk perception. Nonetheless, our findings suggest that these effects might diminish over time without continuous strengthening of climate legislation. (Available here)