Climate news shocks and global financial markets
In this paper, María José Arteaga Garavito, Riccardo Colacito, Mariano Max Croce, and Biao Yang introduce a novel, high-frequency, cross-country measure of climate news attention and show that shocks to global climate news have immediate and persistent effects on exchange rates, stock returns (especially for brown firms in sensitive countries), and international capital flows, independent of traditional measures of climate vulnerability. The authors develop a high-frequency Climate Attention Index (CAI) using over 23 million tweets from major national newspapers across 25 countries (2014–2022). The CAI is calculated at daily, weekly, monthly, and quarterly frequencies for each country.
Methodology:
- A global CAI is constructed as an equally weighted (or GDP/Twitter volume-weighted) average across countries.
- Each country’s CAI is regressed on the global CAI to estimate a sensitivity coefficient (β), reflecting how much a country’s climate news attention co-moves with global climate news.
- The top 15% of days with the largest innovations (unexpected increases) in the global CAI are classified as “climate news shock” days.
- Sentiment and topic analysis (using BERTopic and multilingual sentiment classifiers) distinguishes between physical and transition climate risks and the tone (positive/negative) of news.
- The impact of climate news shocks is studied on:
– Exchange rates: Bilateral FX data is analyzed for country pairs with differing β exposures.
– Stock returns: Over 17,000 firms’ returns are regressed on emission intensity and country β.
– Trade flows: Quarterly data is used to assess the effect on net exports/current accounts. - A two-country, two-period general equilibrium model is developed where investors price climate news shocks and can hedge via international trade and asset markets.
Findings:
Currency Appreciation in Sensitive Countries:
Countries that are more sensitive to global climate news experience persistent currency appreciation following negative climate news shocks. This effect is robust across advanced and emerging market pairs, and persists for several days.
Stock returns and brown firms:
– Brown (high-emission) firms in high-β countries suffer large, persistent negative stock returns after adverse global climate news shocks.
– Brown firms in low-β countries show no significant response.
– The negative impact is strongest when news focuses on transition risks and is negative in tone.
International capital flows and trade:
Highly sensitive countries receive capital inflows (reflected as a decline in net exports) after climate news shocks, consistent with international risk-sharing. This pattern is robust to different weighting schemes and data frequencies.
Distinct from physical vulnerability:
The β sensitivity measure is only weakly correlated with traditional climate vulnerability indices and latitude, indicating it captures a unique dimension of climate-related sentiment rather than physical risk.
International Climate News
Authors: María José Arteaga Garavito, Riccardo Colacito, Mariano Max Croce, Biao Yang
From: Bocconi University, University of North Carolina at Chapel Hill, Shanghai Jiao Tong University
Climate policy and global capital flows
This paper by Marius Fourné and Xiang Li investigates how the stringency of climate policies in destination countries affects the international allocation of capital across four asset types: foreign direct investment (FDI), portfolio equity, portfolio debt, and banking investment. The authors are using data on cross-border holdings for FDI (IMF CDIS), portfolio equity and debt (IMF CPIS), and banking investment (BIS LBS) for about 40 countries and 1,470 country pairs from 2009 to 2019. The main measure is the national climate policy index from Germanwatch, scaled 0–1, based on expert assessments of policy strength.
Findings
- Stricter climate policy in the destination country is significantly and positively associated with higher shares of portfolio equity and banking assets allocated to that country.
- A one standard deviation increase in policy stringency raises the share of equity and banking assets by about 0.12 and 0.17 percentage points, respectively, relative to average allocations of 2.82% (equity) and 4.01% (banking).
- FDI and portfolio debt: No significant effect of climate policy stringency on FDI or portfolio debt allocation.
- Dynamic effects: The positive impact on portfolio equity is persistent for up to five years; banking investment effects are positive but more nuanced across country groups.
- Advanced countries: The effect is strongest when both source and destination are advanced economies; the magnitude nearly doubles compared to the baseline.
- Emerging markets: No significant reallocation effect detected.
- Diversification: Investors are more likely to allocate to countries with stringent climate policies when their existing portfolios are exposed to laxer regulatory environments.
- Green awareness: The effect on equity allocation is stronger when the source country has greater green political representation.
- Uncertainty mitigation: The positive impact of stringent climate policy is amplified during periods of high energy price uncertainty.
Climate Policy and International Capital Reallocation
Authors: Marius Fourné, Xiang Li
From: Halle Institute for Economic Research, Leipzig University
