A Market-Based Measure of Climate Friendliness: Evidence from Anti-ESG Legislation and Extreme Weather Events

Stock prices of firms classified by rating agencies as climate friendly/unfriendly do not respond to climate news. The lack of responsiveness extends to institutional holdings as well as returns and capital flows to green/brown mutual funds. This article proposes a market-based measure of climate friendliness that traces the sensitivity of stock prices to aggregate media attention to the environment while distinguishing the contrasting implications of regulation and nonregulation environment news. In comparison to agency ratings, the market-based measure better captures the decrease in green-minus-brown return spreads following anti-ESG legislation passed in several US states in recent years and reacts more sharply to extreme weather events.