Climate Stress Test: bad (or good) news for the market? An Event Study Analysis on Euro Zone Banks

The scope of this paper is to assess the effect 2021 ECB Climate stress test on the stock prices of the banks included in the exercise. To this end, we set up an event study analysis, whereby at the relevant dates we use market data in order to test for the existence of abnormal returns. Three main results emerge from our research. First, on 18.03.2021 investors’ fear arising from the details published about the methodology of the ECB climate stress test and some preliminary evidence had a negative impact on banks stock prices. Second, on the date of publication of the final results on 22.09.21, we find a positive reaction from market participants, since the market possibly expected the banks’ exposure to climate risks to be greater than the one emerging from final results. Third, on the starting date of COP26, an event related to the worldwide consensus on the need to manage climate change, we find a negative effects on banks’ quote that can be explained by the too tiny progresses reached by the summit, which are considered too mild and not adequate to reach the Paris Agreement goals. Finally, robustness tests including small banks not directly supervised by the ECB and banks with a business model not focused on credit intermediation, indicate that the market consider them less exposed to climate risks than larger banks. Our results may have implications in view of future climate stress tests.