Potential Climate Risks in Financial Markets: A Literature Overview

Ingrid Hjort

Memo 01/2016

Abstract

This literature overview conducts a systematic study of how the climate related risks from global warming may affect financial markets. The climate related risk is divided into three subcategories, the environmental uncertainty, the economic climate risk and the climate policy risk, which all of them may affect the markets directly or indirectly. The perspective is broad, including production possibilities, productivity, social disturbance, health, migration and trade. Stock prices are affected by beliefs about future path of expected return. Climate change signifies possible disruptions in production and consumption possibilities, which may imply reduction in future asset values. Expectations of this will reduce asset values today. There are few studies in the research literature that explicitly attempt to identify mispricing. The survey compares different event studies that may reflect how the financial market react to the climate related risks. The empirical evidence is mixed, and few general conclusions can be drawn. It is unclear whether the market reactions are consistent with rational market valuation of the climate risk.

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Published Jan. 29, 2016 3:03 PM - Last modified Jan. 29, 2019 5:08 AM