Climate risk and stock performance: evidence from UK climate-sensitive sectors

This study empirically investigates the impacts of corporate climate risk, physical climate risk, and transition climate risk on firms’ total factor productivity (TFP), along with their underlying mechanisms, by employing a panel multidimensional fixed-effects model. The sample comprises Chinese listed companies spanning the period from 2007 to 2022. The findings reveal a significant positive effect of corporate climate risk and transition climate risk on corporate TFP, whereas physical climate risk exerts a substantial negative impact. Specifically, corporate climate risk and transition climate risk enhance TFP by elevating green technological innovation levels. Conversely, physical climate risk amplifies financing constraints, thereby diminishing TFP. Notably, these effects are accentuated in firms with higher return on assets, superior internal control quality, and greater institutional investor ownership, particularly among heavily polluting enterprises. Furthermore, while the positive effects of corporate climate risk and transition climate risk on TFP persist with a four-year lag, the negative impact of physical climate risk on TFP diminishes and becomes statistically insignificant over the same period.

Do stock returns respond to physical and transition climate risks? Evidence from emerging BRICS economies

The paper examines the impact of physical and transitional climate risks, which to some extend shape the geopolitical situation in the world, on Russian exports. The gravity model of international trade was employed to model the existing relationship. Estimation of the gravity equation by means of the Poisson Pseudo Maximum Likelihood (PPML) method using data on Russian export flows to 72 countries over the period 2010—2021 revealed that climate change and the ambitions of trading partner states towards low-carbon development determine the dynamics of Russian exports. In particular, national physical climate risks have a detrimental impact on Russia’s exports due to the destruction of infrastructure, loss of capital, reduced quality and availability of natural resources, and increased social tensions. Extreme climatic events and climate change measures in trading partner countries spur the development of Russian exports. Namely, physical climate risks of importing countries may increase the demand for key Russian goods for economic recovery purposes. Changes during the transition to a low-carbon economy in trading partner countries also generate opportunities for Russian export growth due to the country’s role as a major supplier of energy and mineral products, as well as technologies for the alternative energy production and electrification of transport

We measure physical and regulatory climate risks as innovations in several attention to climate change indexes that we construct using search volume data in Google Trends. The intention is to use the constructed risk indexes to test the empirical validity of the clean energy-climate hypothesis, which posits that clean energy prices fall (rise) following a drop (rise) in attention to climate risks. We test the empirical validity of this hypothesis at the macro (market level) using regime switching models and at the micro (firm level) using time-series regressions across clean energy sub-sectors. The macro analysis reveals that our hypothesis is only valid for climate pledges and physical climate risks. When attention to climate pledges drops or when physical climate risks are low, investors become reluctant to hold clean energy assets and vice-versa. Climate policy and climate solution risks have no impact on the nonlinear dynamic behaviour of clean energy prices. These results mean that investors and the public believe that climate policies lack credibility and climate solutions are not effective. The firm-level analysis confirms the findings of the macro analysis and reveals the heterogeneity of climate risks across clean energy sub-sectors.

This study examines both the physical and transition climate risks of 578 bilaterally-financed overseas power projects across 105 countries, funded by the world’s three largest economies–the United States, China, and Japan. We geolocate each power project and obtain forecasted physical climate risk exposures at these locations using data from Moody’s ESG Solutions. We measure transition climate risks using the project specific committed CO₂ emissions and find a positive correlation between physical and transition climate risks across these projects—which are driven primarily by fossil fuel investments. Coal power plants exhibit the highest level of both physical and transition climate risks. Although hydropower projects tend to have lower carbon emissions, they face the highest flood risk among all fuel types. We find no evidence that the positive relationship between physical and transition climate risks varies by financier country or financing type. These results highlight the need for integrated climate risk assessments in international energy finance and underscore the potential for climate-related liabilities to compound across multiple risk channels.

Climate change risks and the clean energy-oil-technology prices nexus

This study examines how climate change affects systemic risk in the Polish banking sector, focusing on both physical and transition climate risks. We argue that jointly integrating these risks providesa more accurate view of systemic vulnerability. Using a multidimensional framework, we extend the climate stability measure CRISK by incorporating temperature anomalies (physical risk) anda stranded assets index (transition risk). The dataset spans 2005–2023 and covers stock prices of eight systemically important banks, market shocks, and climate proxies tailored to the Polish context. Bank-specific sensitivity factors are estimated with a multivariate GJR-DCC-GARCH model on monthly data, capturing time-varying relationships between market and climate factors. The results show climate shocks significantly increase systemic risk, especially during crises such as Covid-19 and the war in Ukraine, with banks exposed to brown assets most fragile. The study is the first to jointly integrate both climate risks in Poland, offering a replicable methodology for other contexts.

This paper examines the effect of climate uncertainty on the spillover effects across the European conventional and environmental, social, and governance (ESG) financial markets via novel measures of physical and transitional climate risk proxies obtained from textual analysis. Analyzing daily data for stocks in the MSCI Europe ESG Leaders Index and various Euro based ESG bond indexes over the period January 3, 2014–September 30, 2021, we show that the shock transmissions between the conventional and ESG assets are significantly lower during periods of high climate uncertainty, suggesting that ESG investments can offer conventional investors diversification benefits against climate-driven shocks. Further comparing a forward-looking investment strategy conditional on the level of climate risk against the passive investment strategy, we show that investors who are worried about physical climate risks could utilize ESG equity sector portfolios as a diversification tool against physical climate uncertainty. In contrast, ESG bonds are found to be particularly useful in managing transition risk exposures that are associated with policy uncertainty and/or business transitions with respect to environmental policies. The findings have important implications regarding the role of climate uncertainty as a driver of informational spillovers across the conventional and ESG assets with important insights to manage climate risk exposures.

Facilitating Climate-Smart Investments

<p>Climate risk, and related impacts, are determined by a variety of natural, climatological and socio-economic factors. In its fifth Assessment Report, the Intergovernmental Panel on Climate Change has adapted the concept and terminology in this respect. The challenge is: How can relevant influencing factors be identified and integrated? And, how can these factors be represented spatially and integratively in order to provide decision makers with a sound basis for adaptation measures? The central starting question is: Where do I do what (and when)? Within the Austrian ACRP project 'RESPECT', a novel climate change risk analysis for the natural hazard 'flooding' was developed. Special attention is paid to the modelling of socio-economic and physical vulnerability and its integration into a spatially explicit climate risk analysis. As a result, spatial and thematic hotspots of social and physical vulnerability and climate risk for Austria are identified, which serve as a basis for the identification of adaptation measures.</p><p>As a result, climate risk maps are available for Austria, which show risk and vulnerability hotspots as homogeneous spatial regions, independent from administrative boundaries and traditional raster-based approaches. These hotspots are quantitatively evaluated by an index value as a measure of climate risk. In addition to the purely quantitative evaluation, it is also possible to characterise and present the spatial units qualitatively, in terms of 'problem areas' and contributing factors. This is a significant development compared to 'traditional' spatial units (grid cell based; based on administrative units). Thus the question mentioned at the beginning can be answered - where are which intervention measures necessary. The results are available for socio-economic and physical climate risk, which are flanked by corresponding hazard and vulnerability maps. Results for the present and the future have been produced using proxy indicators from the high-resolution Austrian climate change scenario data (ÖKS15). This makes it possible to identify future hot spots under the assumption of different climate scenarios. The presentations presents the adapted risk concept and methodological approach, respectively, and reflects critically on the opportunities and challenges of climate risk analysis in Austria and in general for the planning of climate change adaptation measures.  </p>

This paper examines the impact of transition and physical climate risk on stock markets using, for the first time in this context, the annual CCPI index calculated by Germanwatch as well as its components (in addition to a wide range of other indices) for 48 countries from 2007 to 2023. Specifically, a balanced panel VAR model is estimated to obtain impulse responses for the whole set of countries considered as well as for a subset including the EU-28 only; other methods such as Forecast Error Variance Decomposition and Local Projections (Jorda, 2005, 2022) are then applied for robustness checks. The results suggest a positive impact of transition risk on stock returns and a negative one of physical risk, especially in the short term. Further, while physical risk appears to have an immediate impact, transition risk is shown to affect stock markets also over a longer time horizon. Finally, national climate policies seem to be more effective when implemented within a supranational framework as in the case of the EU-28.

Climate change and global warming have been shown to increase the frequency and intensity of extreme weather events. Concurrently, substantial efforts are being directed toward fostering the transition to a low-carbon economy. These concurrent trends result in the emergence of both physical and transition climate risks. This study investigates the impacts of climate risks, both physical and transition, on the return of major industrial metals (aluminum, copper, iron, lead, tin, nickel, and zinc) between January 2005 and December 2023. Employing the novel multivariate quantile-on-quantile regression (m-QQR) approach, this study examines how climate risks affect metal markets under different market conditions and risk levels. The results reveal that transition risks exert a more significant adverse impact on metal returns during bearish markets conditions, particularly for metals linked to high-emission industries, while physical risks affect metal returns across a wider range of quantiles, often increasing volatility during extreme market conditions. Furthermore, copper and nickel, both of which are crucial for renewable energy development, demonstrate resilience at higher quantiles, highlighting their role in the transition to a low-carbon economy. Finally, these two metals may serve as effective hedges against losses in other metals that are more vulnerable to transition risks, like aluminum and lead.

Introduction: Currently, extreme weather events and natural disasters are occurring frequently, and countries around the world are facing a variety of physical climate risks. More and more countries are attempting to embed financial tools into the process of climate risk governance. However, the financial strength of developing countries is insufficient to enhance regional resilience to physical climate risks. Moreover, existing literature mainly focuses on the impact of financial development on greenhouse gas emissions, neglecting its crucial role in adaptation. Discussion: The present study enriches people's understanding at the national level of whether and how financial development is affected by physical climate risks. Additionally, it provides significant reference for financial reforms and physical climate risk governance in other countries and regions from the perspectives of inclusive finance and green finance, utilizing econometric methods. Conclusion: (1) Financial development effectively facilitate the governance of physical climate risk. (2) Green finance and inclusive finance intensify the negative effect of financial development on physical climate risk. (3) Financial development can governance physical climate risk by bolstering technological innovation. (4) Financial development significantly promotes physical climate risk governance only in regions with large populations, resource abundance, well-developed insurance sectors, and strong governmental intervention. Key policy insights Green finance and inclusive finance enhance the positive effect of financial development on physical climate risk governance. Financial development is conducive to the improvement of local technological innovation capabilities, which can help govern physical climate risk. The effective governance of physical climate risk by financial development only occurs in regions with large population size, resource endowment, insurance payout, and the degree of government intervention level.

By constructing a physical climate risk index and employing system GMM and double machine learning models, this study empirically explores the impact of physical climate risk on renewable energy investment across 64 Belt and Road countries from 2000 to 2022. The results indicate that physical climate risk significantly drives renewable energy investment, especially in hydropower and solar energy. Regional and temporal heterogeneity analyses show that investment growth is more pronounced in higher-income and coastal countries, as well as after the launch of the Belt and Road Initiative. Mechanism analysis reveals that physical climate risk can promote renewable energy investment by stimulating technological innovation. Furthermore, renewable energy policies and governance quality positively moderate the relationship between physical climate risk and renewable energy investment. This study extends the literature by clarifying how physical climate risk affects renewable energy investment in developing countries and offers policy insights for addressing climate risks and promoting clean energy transitions.

Carbon allowances amid climate change concerns: Fresh insights from wavelet multiscale analysis