Impact of climate change risks on the financial markets

Abstract

The financial sector that provides funding for climate change mitigation and adaptation is not protected from climate change. However, there is a lack of knowledge about financial markets’ response to climate change regarding asset pricing. The main concern is effects of climate change on companies and their performance in the long term. This thesis studies how climate risks impact financial markets by analyzing assets’ market performance. Interested in climate risk in general, the thesis also investigates regulatory climate risk as being the most recognized by companies. This thesis comprises four scientific articles that present the results of quantitative empirical research conducted on secondary market data. Two of these articles apply event study methodology to assess the market reaction to events related to climate policy, linking them to the regulatory climate risk. The findings show that climate policy‐related events, such as the adoption of the Paris Agreement, significantly affect stock returns and even cause a long‐term shift in price fluctuations. In the case of green bonds, such events also influence their return per unit risk and correlation with other assets. The other two articles depart from the assumptions of sustainable investments and investigate the performance of sustainable and climate‐aligned investments in the Norwegian context. The results suggest a significant underperformance of high‐climate‐risk stocks and a neglectable return difference between low and high sustainable stocks. A long‐short climate‐aligned investment strategy was found to be profitable and thus preferable. Overall, this thesis discovers a significant impact of climate risk on asset prices and argues that investors might benefit from distinguishing assets by their climate risk exposure. Recognition of climate risks becomes even more important for long‐term oriented value‐driven investors.

Impact of climate change risks on the financial markets

Effekten av klimaendringer på finansmarkedene