Hedging the climate change risks of China’s brown assets: Green assets or precious metals?

Abstract

A large discrepancy exists between the dire impact of climate change projected by most natural scientists and the modest estimates of damages calculated by mainstream economists. In this article, we first measure the climate risk, including the transition and physical risks, in China using textual analysis. Then, considering the heterogeneity of climate change’s effect, we investigate the impact of climate risks on the brown and green assets of China (including price, volatility, and correlation) for the period from February 2012 to April 2022. In addition, the performance of China’s green assets and international precious metal assets is examined in hedging the climate risk exposure of China's brown assets. The results reveal that transition and physical risks lead to contrary changes in the prices of brown and hedging assets. Transition risk causes the volatility of brown and green assets to change in the opposite direction, while physical risk causes the volatility of the two types of assets to change in the same direction. Under extreme climate risk conditions, the correlation between brown and hedging assets decreases. Finally, the findings show that the performance of international precious metals in hedging climate risk exposure is better than that of China’s green equity assets.