Climate-related risks in financial assets

Abstract

The financial risks and potential systemic impacts induced by climate change and the transition to a low-carbon economy have become a central issue for both financial investors and their regulators. In this article, we develop a critical review of the empirical and theoretical literature concerning the impact of climate-related risks on the price of financial assets. We first present the theoretical links between asset pricing and climate-related risks and develop a theory of how climate risk drivers transmit costs to firms and lead to asset price changes. We then discuss studies looking at past climate-related events, which show that both climate physical impacts and transition dynamics can trigger a revaluation of financial assets through multiple direct and indirect channels. Finally, we review the emerging literature that uses forward-looking methodologies to estimate future climate-related asset price changes, which suggests that climate financial risks can indeed have significant implications on financial stability.