Market-Based Green Firms

This paper proposes a simple but effective tool to measure firms' exposure to climate risk: the market. We first develop a model showing that abnormal stock returns around significant climate policy events measure a firm's exposure to climate risk. On this basis, we create market-based firm greenness measures for around 36,000 international firms based on abnormal returns around UN climate conferences. The resulting measure creates intuitive rankings of sector-level climate-risk exposure and is correlated with, but distinct from existing measures. At the firm level, market-based greenness is associated with lower present and future carbon emissions. 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.