Investors' Climate Sentiment and Financial Markets

Abstract

We propose a measure of investors’ climate sentiment by performing sentiment analysis on StockTwits posts on climate change and global warming. We find that investors’ climate sentiment generates a mispricing in the Emission-minus-Clean (EMC) portfolio (Choi et al.,2020), the portfolio that invests in emission stocks and goes short on clean stocks. Specifically, when investors share a positive attitude towards climate change, they tend to overvalue the negative externalities produced by emission stocks. Moreover, we show that carbon prices area successful incentive to reduce CO2 emissions. Finally, a portfolio strategy that uses information on investors’ climate sentiment and carbon prices generates a return of 9.77% annually.