Monetary Policy and the Green Transition: Evidence of Heterogeneous Stock Market Responses in the UK

Abstract

As central banks increasingly consider the implications of climate change, understanding how monetary policy interacts with the green transition has become a pressing issue in both macroeconomic and financial research. This thesis investigates whether firm-level environmental performance influences stock price responses to monetary policy surprises in the UK. Using a panel of 319 UK-listed firms and 74 monetary policy events between 2015 and 2024, the analysis combines high-frequency monetary policy surprise data with daily stock returns and firm-level environmental scores. A fixed effects regression framework is used to estimate stock return responses to three types of monetary policy surprises: bank rate, forward guidance, and quantitative easing, and interacts these with environmental performance. The findings reveal that forward guidance surprises produce the most significant equity price reactions, and that greener firms consistently exhibit smaller stock price responses. The effect is concentrated among the most and least green firms, suggesting a non-linear relationship. The results are moderately robust to alternative specifications, providing credibility to the findings. These findings provide new evidence on the role of environmental characteristics in shaping monetary policy transmission to equity markets. It is the first study of its kind on the UK market, offering insights for policymakers, firms, and investors navigating the transition toward net-zero.