Thesis
Political economy of green transition : financial markets and corporate green revenue
- Creator
- Rights statement
- Awarding institution
- University of Strathclyde
- Date of award
- 2025
- Thesis identifier
- T17425
- Person Identifier (Local)
- 202066755
- Qualification Level
- Qualification Name
- Department, School or Faculty
- Abstract
- The lack of commitment by political leadership to a long-term policy pathway for green transition has been a long-standing problem in addressing climate change crises (Besley & Persson, 2023). One important but overlooked factor in the green transition is the influence of political leaders' climate science beliefs and ideological disposition and the consequent effect on the perception and behaviour of capital market participants. This thesis comprises three empirical essays that explore the political economy of the green transition through the lenses of climate political leadership beliefs, policy decisions, and their consequential impacts on financial markets and corporate green performance. The first essay (Chapter Two) investigates the impact of Climate Political Leadership (Hereafter, CPL) on firm-level market perception of climate regulatory exposure (FL-MPCRE). Using the unexpected outcome of the 2016 U.S. Presidential election results in a quasi-natural experiment, I examine whether the surprising transition from supportive climate political leadership (SCPL) to climate sceptic political leadership (CSPL) creates exogenous variation in market participants' perceptions of firm-level climate regulatory exposure. Recent surveys of investors, firms, academics, and regulators indicate that regulatory risk is the most salient and immediate type of climate risk(Krueger, Sautner, & Starks, 2020; Stroebel & Wurgler, 2021a). Hence, I focus on the impact of climate political leadership on firm-level regulatory exposure. Leveraging the Bayesian investor belief updating model of Pastor & Veronesi (2012, 2013) and Social Identity Theory, I demonstrate that the emergence of CSPL significantly lowers FL-MPCRE, supporting the view that climate political leadership is an upstream driver of cross-sectional and temporal variation in FLMPCRE. I identify the beliefs of political leaders through climate-deregulatory actions and public anti-climate rhetoric as the primary driver of market participants' perception of firm-level regulatory exposure, factoring in the associated perceived costs and benefits of the regulatory regime within a utility maximisation framework. The proposed mechanism updates market participants' prior beliefs, forming new expectations and forward-looking perceptions, which is the primary driver of investment behaviour. Furthermore, institutional investor ownership concentration, financial constraints, and industry carbon intensity moderate this inverse relationship. Extending this analysis to capital market implications, I observe that institutional investors increased their holdings in firms operating under deregulatory regimes. These firms receive higher market valuations, highlighting the misallocation of capital and friction in the green transition process as consequential implications of an unexpected shock to supportive CPL. The second essay (Chapter 3) builds on the findings of the first essay (Climate Political Leadership and Financial Market Perception) by exploring the relationship between climate-sceptic political leadership and corporate green innovation, using patent filings as a proxy for green innovation. Using the Race-to-the-bottom, Dynamic Complementarity, and signalling theories, I show that the emergence of climate sceptic political leadership dampens corporate green innovation. This adverse effect is more pronounced in financially constrained firms and firms in carbon-intensive industries. The third essay (chapter four) examines the relationship between the European Union's green taxonomy policies under supportive CPL and corporate green revenue. I employ a novel global FTSE Green Revenue dataset and a difference-in-differences approach with entropy balance scores to adjust covariate weights. I demonstrate a positive causal relationship between Green Taxonomy policy and corporate green revenue. Further analysis reveals that environmental innovation is a key economic mechanism driving this relationship. Cross-sectional analysis strengthens these findings, showing that the effects are more pronounced in firms with higher stock liquidity, high analyst coverage, and those with lower financial constraints. This thesis's findings collectively emphasise CPL's pivotal role in the political economy of the green transition. First, the finding suggests that climate-sceptic political leadership undermines the creation of sufficient climate risk signals necessary to drive corporate behavioural changes toward effective climate mitigation and adaptation strategies. Specifically, the beliefs and consequential regulatory actions of climate sceptic political leaders significantly sway the global decarbonisation effort. Second, the results demonstrate the significant role of climate political leadership in fostering the regulatory environment necessary to catalyse necessary structural changes at production and consumption through the generation of appropriate incentives to stimulate corporate engagement in green innovation and the generation of green revenue through engagement in sustainable business practices. Such regulatory incentives modify market participants' behaviour and improve their climate-responsible activities. The results carry significant implications for green transition policies, highlighting the significance of political leaders' robust long-term climate regulatory commitment to incentivise corporate shifts towards sustainable business practices.
- Advisor / supervisor
- Thapa, Chandra
- Hillier, Peter
- Resource Type
- DOI
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PDF of thesis T17425 | 2025-07-22 | Public | Download |