Abstract
We examine how low carbon transition risk (LCTR) is related to investors' asset allocation decisions, using the COVID-19 pandemic as an exogenous shift to climate change awareness. After employing Diebold and Yilmaz’s (2012) return spillovers, and Markov-regime switches from October 2017 to June 2021, our findings suggest that firms with LCTR play a dominant role in influencing the returns of other asset classes. Since LCTR firms are more flexible in switching to a low carbon economy; therefore, one possible way to mitigate the impact of LCTR firms is to invest in such firms during a period of increased environmental awareness.
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