A Green Wave in Media: A Change of Tack in Stock Markets

Are financial markets sensitive to media coverage of environmental news?

Rising environmental concerns are an increasingly material force driving investment decisions and asset allocation by market participants, who often rely on newspapers to keep up-to-date with the latest environmental news.

Marie Bessec and Julien Fouquau analyse how US media report environmental news and how they influence the reactions of financial markets in their « A green wave in media, a change of tack in stock markets » article.

Their main conclusions include:

• Brown indices are negatively affected by greater coverage of environmental news, especially in the case of uncertain or negative coverage.
• This coverage has a positive impact on the return and volatility of leading green indices, especially when they target specific indicators within the environmental pillar.
• The impact measured depends on the newspapers taken into account: it is lower when the authors consider only a few newspapers, but becomes noisy when they add too many.
• Media tone is a more accurate proxy for market volatility than mere media coverage
• Some newspapers are more likely to affect the market than others, with unsurprisingly those of greater visibility and relevance like the Wall Street Journal leading the pack.

The metrics of media coverage and tone developed in this article, along with the dictionary-based approach of the authors, can be used by practitioners to enhance their assessments of their climate risk exposure.

Further research could carry out a similar work using a social-based lexicon to broaden the conclusions of this paper to a more comprehensive set of extra-financial indicators.

A natural limitation of this work resides in the choice of the media sources, which had to be limited to reduce noise. Further controls for factors like language and origin country of the sources could prove themselves valuable.