Innovation in climate adaptation technologies: A catalyst for financial market dynamics?

Climate change adaptation has become a critical priority, yet the financial valuation of innovation efforts in this domain remains poorly understood. While Climate Change Adaptation Technologies (CCATs) are increasingly recognized as essential components of innovation ecosystems addressing grand societal challenges, limited empirical evidence exists on how markets respond to innovation in this specific technological class. This study addresses this gap by examining the relationship between CCAT patenting activity--measured through CPC classification Y02A--and the excess returns of sustainability-oriented financial indices (S&P Global Eco Index, the S&P 500 Carbon Efficient Index, and the S&P Renewable Energy and Clean Technology Index). Using a state-space model and a Kalman filter estimation approach, we construct a latent variable capturing the dynamic effects of CCAT innovation. Our findings reveal that both the level and the acceleration of patent activity positively influence index performance, with markets responding more strongly to surges in innovation momentum. However, the effect is mean-reverting, indicating that sustained innovation is required to preserve its financial signaling power. These results offer novel insights into how adaptation-oriented innovation contributes not only to technological resilience but also to investor confidence and sustainability-driven market value. The study contributes to theories of innovation ecosystems and climate finance while informing firms and policymakers on the strategic relevance of CCAT investments.