Climate‐related risks in financial assets

Abstract

AbstractThe financial risks and potential systemic impacts induced by climate change and the transition to a low‐carbon economy have become a central issue for both financial investors and their regulators. In this article, we develop a critical review of the empirical and theoretical literature concerning the impact of climate‐related risks on the price of financial assets. We first present the theoretical links between asset pricing and climate‐related risks and develop a theory of how climate risk drivers transmit costs to firms and lead to asset price changes. We then discuss studies looking at past climate‐related events, which show that both climate physical impacts and transition dynamics can trigger a revaluation of financial assets through multiple direct and indirect channels. Finally, we review the emerging literature that uses forward‐looking methodologies to estimate future climate‐related asset price changes, which suggests that climate financial risks can indeed have significant implications on financial stability.