It's serious business for the world establishing a framework to limit the impact of climate change, but for some, market responses to the annual United Nations Conference of Parties (COP) climate negotiations are also a chance to make some serious money.
In a paper recently published in the journal Energy Economics, an Australian research team has analysed the activity around COP meetings of "informed traders", referring to any investor acting on non-public information that enables them to trade ahead of the market.
"We found that fossil fuel firms experience significant spikes in informed trading during COP meetings, with estimated gains of up to $25 billion across the fossil fuel firms and COP meetings we analyse in the study," said co-lead author Professor Martina Linnenluecke, Director of the Centre for Climate Risk and Resilience in the UTS Business School at the University of Technology Sydney (UTS).
The research team also included Dr Caroline Chen from RMIT University, Dr Mona Mashhadi Rajabi from the UTS Centre for Climate Risk and Resilience, Professor Tom Smith from Macquarie Business School, and Xin Ling from the University of Queensland Business School.
"COP climate talks are major global negotiations that can materially affect the value of fossil fuel companies," Professor Linnenluecke said. "These meetings involve thousands of delegates, industry representatives and observers.
"We wanted to know whether people with early indications of how the talks are likely to unfold would appear to trade on that knowledge before anything is publicly announced.
"To test that, we introduced a new methodology to understand what is happening in markets around COP meetings, estimating the probability of informed trading based on data from a sample of 87 US-listed fossil fuel firms between 2006 and 2023.
"We found that the most pronounced signals would appear just before the meetings began, often on the Friday and Monday when delegates were arriving and preliminary events were taking place.
"During these periods, fossil fuel stocks behaved as if some traders had advance insight into the direction of climate policy.
"In other words, if negotiations were heading towards a stronger climate agreement, fossil fuel stocks were likely to fall and selling early could be profitable. By contrast if negotiations looked weak buying early would pay."
Professor Linnenluecke said the findings estimated informed traders could have earned up to $25 billion across the COP meetings and 87 firms studied, with the highest profit earned around COP20 of more than $12 billion.
"As concerning as it is, this type of informed trading activity is not illegal and there are no rules to govern it," Professor Linnenluecke said.
"It's a problem though when COP decisions shape the pace and direction of the global energy transition and any information imbalance during these negotiations has consequences for market fairness, investor protection and climate policy credibility.
"Our findings suggest there should be stronger disclosure rules, as well as clearer communication protocols and safeguards that prevent privileged access to negotiation information from becoming a source of private gain."
