N°25-104: Market-Based Green Firms

This paper proposes a simple but effective tool to measure firms' exposure to climate risk: the market. We develop a model showing that abnormal stock returns around significant climate policy events measure a firm's exposure to climate risk. Building on this theoretical foundation, we create market-based greenness measures based on abnormal returns around UN climate conferences. Our measurement of climate risk covers around 36,000 international firms, a tenfold increase relative to existing measures. It is associated with lower present and future carbon emissions and provides explanatory power distinct from existing climate risk measures. Market-based green firms are more likely to file green patents, have lower stock-price volatility, and tend to be financially more robust. At the country level, market-based greenness is associated with lower emission intensity and a larger share of renewable energy.