Working Paper: CEPR ID: DP15557
Authors: Stefano Giglio; Johannes Stroebel; Bryan Kelly
Abstract: We review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macro-finance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes including real estate, equities, and fixed income securities. In this context, we also discuss how investors can use these assets to construct portfolios that hedge against climate risk. We conclude by proposing several promising directions for future research in climate finance.
Keywords: Climate Change; Climate Risk; Physical Risk; Transition Risk; ESG
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher greenhouse gas emissions (F64) | Climate change (Q54) |
| Climate change (Q54) | Negative impact on future economic activity (F69) |
| Climate change (Q54) | Asset prices (G19) |
| Financial markets reallocating capital towards sustainable projects (G19) | Mitigation of climate risk (Q54) |
| Investor awareness and attitudes towards climate risks (G41) | Changes in asset pricing (G19) |
| Climate risks (physical and transition) (Q54) | Differential effects on asset prices across sectors (G19) |
| Properties exposed to rising sea levels (Q25) | Decline in value (D46) |
| Renewable energy firms (Q48) | Benefit from transition to low-carbon economy (P28) |