The stock markets’ reflection on the IPCC’s findings

Climate change already has widespread impacts on society, including the performance of stock markets. Previous studies have focused on how financial markets react to natural disasters such as extreme weather events and provided empirical evidence and mechanistic processes on how this information is assimilated by the investors. Market efficiency theory indicates that investors and financial institutions rely on all available information when managing their portfolios, and change their position as new information arises. Based on empirical analysis, here we show for the first time that investors closely follow the discussion generated by the Intergovernmental Panel on Climate Change (IPCC) and its Working Groups and we quantify the US stock market’s reactions to the publication of their reports. Our results show that the market recognises the importance of the IPCC findings, although there seems to be a reduction in the stock market’s reaction with every passing IPCC report. This highlights the effectiveness of scientific bodies in communicating knowledge to different sectors of society, and the importance of maintaining these institutions as honest brokers of scientific information.

Chatzivasileiadis, Theodoros, Richard S. J. Tol, Francisco Estrada and Marjan W. Hofkes (2018), The stock markets’ reflection on the IPCC’s findings, Department of Economics, University of Sussex.