The Impact of Climate Change Risks on International Financial Markets and Investment Strategies

Abstract

Climate change has become a crucial global issue affecting both the environment and financial markets. As noted by the Intergovernmental Panel on Climate Change (IPCC), the increased frequency and severity of extreme weather events, sea-level rise, and changing precipitation patterns present significant risks to the stability of international financial systems. Moreover, efforts to reduce carbon emissions and promote sustainable practices are reshaping investment landscapes, requiring investors to incorporate climate risks into their strategies. This research explores the integration of climate risks into financial decision-making by examining the impacts of both physical risks—stemming from direct climate events—and transition risks—resulting from the shift to a low-carbon economy and regulatory changes. Employing quantitative methods such as Vector Auto regression (VAR), Autoregressive Distributed Lag (ARDL), and Panel Data Analysis, the study analyzes the effects of climate change on international financial markets and investment strategies. The findings reveal significant long-term and short-term impacts of climate risks on asset valuations, investor behavior, and market dynamics. By providing insights into the materiality of climate risks, this study contributes to the development of effective risk management strategies and promotes sustainability in financial practices.