Political Polarization and Climate Finance: Global Evidence on Markets, Firms, and Capital Flows

Project description

Political polarization refers to the widening of ideological divisions that erode institutional trust, reduce policy stability, and weaken collective action. Beyond its political implications, polarization functions as an economic friction: it alters perceptions of risk, complicates investment decisions, and introduces uncertainty into policy regimes. In the context of climate change, where coordinated responses and long-term commitments are essential, polarization poses a significant barrier to effective adaptation and mitigation. Prior research demonstrates that political polarization influences economic and financial outcomes in diverse ways. Studies have shown that ideological divisions shape how investors allocate capital, with partisan identity affecting portfolio choices and cross-border investment flows (Kempf et al., 2024). Polarization also increases uncertainty in financial markets, amplifying volatility and altering the way information is processed and priced (Pastor & Veronesi, 2023). At the organizational level, political alignment among executives and analysts can influence decision-making, credit spreads, and long-term investment outcomes. While this literature highlights the significant role of polarization in shaping markets and corporate behaviour, its implications for managing climate change risks remain underexplored. This project will build on this literature by analysing how polarization, across both national and local contexts, affects the capacity of financial systems and firms to respond to climate risks. The aim is to identify the mechanisms through which political divides reshape markets, alter how shocks are processed, and influence corporate strategies in managing uncertainty related to climate change. Specifically, the project will investigate how polarization changes the allocation of resources needed for climate transition, how it shapes investor and firm responses to climate shocks, and how it creates spillover effects across regions and economies. Research Questions 1. How does political polarization influence financial markets and the allocation of investment in ways that affect responses to climate change risks? 2. In what ways does polarization mediate how climate shocks are perceived and acted upon by investors, institutions, and policymakers? 3. How do firms adapt their investment strategies, disclosures, and risk management practices when facing climate-related uncertainty in polarized environments? Methodology The study will combine cross-country, regional, and firm-level financial data and climate-related disclosures with measures of polarization from elections, media, and institutional records. Event studies around political and climate shocks will identify causal effects on market and organizational behaviour, while comparative analyses will examine how these dynamics differ across national and local contexts.

Outcomes

The project will show that polarization constrains financial systems’ ability to support climate adaptation and mitigation, disrupts the flow of resources into climate-related investments, and alters how risks are processed by investors and firms. It will highlight how political divides at both national and local levels create spillover effects across markets and institutions, leading to uncertainty that weakens climate resilience. The findings will provide a new framework for understanding how polarization interacts with climate risk and generate recommendations for strengthening policy credibility, market stability, and corporate adaptation in polarized contexts.

Essential capabilities

Strong Quantitative Skills (Proficient in econometrics, mathematics and statistics), Theoretical Foundation in Finance (Corporate finance, financial markets, risk management), Strong Academic Writing & Communication, Persistence and Independence

Desireable capabilities

Programming & Technical Edge ( Stata, R or Python), Comfort with large datasets and financial databases (Bloomberg, Refinitiv, Prowess, etc.).

Expected qualifications (Course/Degrees etc.)

Bachelor’s Degree with Honours or Master’s degree in Business/ Commerce/ Finance/ Technology