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Pricing of climate risks in financial markets: a summary of the literature

Author

Listed:
  • Egemen Eren
  • Floortje Merten
  • Niek Verhoeven

Abstract

This paper summarises the academic literature on the financial market pricing of physical and transition risks related to climate change. While studies find that these risks are starting to be priced, concerns are growing that current prices do not fully reflect the risks. Investors grapple with three major challenges when seeking to price climate risks adequately. First, the aggregate nature of climate risks limits the availability of risk-sharing arrangements and hedging instruments. Second, the high degree of uncertainty about climate risks and concrete policy actions to address them heightens modelling and measurement challenges. Third, the information available to investors about climate risks and their consequences is often incomplete or imperfect.

Suggested Citation

  • Egemen Eren & Floortje Merten & Niek Verhoeven, 2022. "Pricing of climate risks in financial markets: a summary of the literature," BIS Papers, Bank for International Settlements, number 130.
    • Handle: RePEc:bis:bisbps:130
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    References listed on IDEAS

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    Cited by:

    1. Sirio Aramonte & Frank Packer, 2022. "Information governance in sustainable finance," BIS Papers, Bank for International Settlements, number 132.

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