Transition from brown to green: Analyst optimism, investor discount, and Paris Agreement

This paper studies financial analysts' evaluation of brown (fossil fuel) versus green (renewable) energy stocks. We find that, compared to green energy stocks, analysts tend to issue more Buy and fewer Sell recommendations for brown energy stocks. Such optimism for brown energy stocks is reduced after the commencement of groundwork for the Paris Agreement. This is especially so for coal stocks than for oil and gas stocks. We also find that, compared to recommendations on green energy stocks, those on brown energy stocks receive a lower reaction from investors, suggesting an investor discount on the informativeness of analyst recommendations on brown energy stocks. Further analysis indicates that in recent years such informational discount has diminished and investors' reliance on analysts' opinions about brown and green energy stocks has converged. Our paper discusses possible reasons for the observed differences and changes in evaluating brown vis-à-vis green energy stocks.