Conference Programme

This paper studies how climate policy is associated with the repricing of sustainability misvaluation that arises when investor’ perceived green resilience diverges from firms’ revealed ESG vulnerability. Around major policy announcements, including COP meetings and the 2022 SEC disclosure proposal, we document systematic directional repricing in U.S. equities. On average, expected returns increase for firms whose resilience was previously overestimated and decrease for firms whose resilience was underestimated. The magnitude of repricing varies with market sentiment toward greenness: elevated ESG optimism anchors expectations and attenuates expect return repricing, whereas ESG pessimism is associated with sharper adjustments. We also show that sentiment driven discount rate compression is concentrated among low resilience brown firms, making them more exposed to optimism risk in the cross-section. Consistent with this mechanism, a state-dependent tradable strategy based on sentiment betas earns a positive premium, suggesting that sentiment reversal risk is priced. Overall, the findings support a belief revision channel through which climate policy news is reflected in asset prices, with implications for sustainable investing and disclosure regulation.