Green ECB Speeches Matter

Green speeches by the European Central Bank (ECB) have a “substantial and statistically significant impact” on financial markets and can be used to further green goals, finds this paper by senior officials at the Magyar Nemzeti Bank.

The authors, Gabor Neszveda and Bence Siket, used a green sentiment index to evaluate the greenness of ECB speeches between the years 2010 to 2020 and their impact on the stock returns of portfolios with differing emissions reduction records. 

Green speeches have a “primary green focus” as well as a title which contains at least one green-related term. The authors then check if the overall tone is consistent with green sentiment by going through the speeches by hand.

The results show that the performance of the most polluting portfolios lags far behind greener portfolios, suggesting that firms that fail to reduce their emissions will suffer losses following green speeches. The authors also find that the strongest effects emerge following the greenest ECB speeches and the greener the speech the stronger the impact on firms. 

The authors follow a three-step methodology to assess the impact of speeches on firms. Firstly, they assess the return differences between high and low emission portfolios. Secondly, they evaluate abnormal return values through event studies that explore the impact of the greenest ECB speeches. Finally, they perform regression analysis on a cross section of returns using all speeches to examine the variation across different levels of green sentiment.

The portfolio level analysis shows that the average daily raw returns of green portfolios outperform high emitting portfolios following high green sentiment speeches. 

The results also show that the higher the green sentiment, the stronger the raw return difference is. The raw return difference between the portfolios with the highest and lowest emissions score portfolios is substantially greater for the top five green sentiment speeches (0.72%) than for the top 10 speeches (0.46%).

The event study gauges the cumulative average abnormal returns following the top five greenest speeches. The authors find an economically high, statistically significant abnormal return at the 1% level for the event period. 

On the days of these speeches, the portfolios containing stocks with the worst emission scores underperform the greenest portfolios by at least a daily 0.5% return, yielding an economically and statistically significant return difference.

According to the authors, the event study results also indicate that investors monitor the green speeches of the ECB decision-makers and rebalance their portfolios accordingly.

The results from the cross sectional regression analysis confirm that this relation between green speeches and stock return differences is a general one that holds across various levels of green sentiment. It also shows that the relation remains even after controlling for several risk factors.