Are investors sensitive to climate-related transition and physical risks? Evidence from global stock markets

Abstract

We construct indices of climate-related physical and transition risks using newspapers to explore whether global stock market investors are sensitive to the different types of climate risk and whether this sensitivity depends on firms’ environmental performance. Estimates show that stock prices respond negatively to perceived changes in climate risk, and that “green” (“brown”) firms are rewarded (penalised) by the market when climate risks increase. Subsample analyses further reveal that while the effect continues to hold for firms headquartered in advanced economies (AEs), the equity prices of emerging market (EME) firms yield modest, if not insignificant, reactions, pointing to a relatively low level of climate-risk sensitivity in EMEs. As EMEs face significant challenges arising from climate change, this raises the concern of disorderly financial market repricing when investors come to terms with the very real threats that climate change poses to firms in these economies.