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

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  • Zhang, Si Ying

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.

Suggested Citation

  • Zhang, Si Ying, 2022. "Are investors sensitive to climate-related transition and physical risks? Evidence from global stock markets," Research in International Business and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:riibaf:v:62:y:2022:i:c:s0275531922000988
    DOI: 10.1016/j.ribaf.2022.101710
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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