Decomposing Climate Risks In Stock Markets

Climate change poses an unprecedented challenge to the world economy and the global financial system. This paper sets out to understand and quantify the impact of climate mitigation, with a focus on climate-related news, which represents an important information source that investors use to revise their subjective assessments of climate risks. Using full-text data from Financial Times from January 2005 to March 2022, we develop machine learning-based indicators to measure risks from climate mitigation, and the direction of the risk is identified through manual labels. The documented risk premium indicates that climate mitigation news has been partially priced in the Canadian stock market. More specifically, stock prices react positively to market-wide climate-favorable news but they do not react negatively to climate-unfavorable news. The results are robust to different model specifications and across equity markets.

Climate change is becoming a common threat to the world and has been studied by scholars in various fields. In the field of finance, many papers have discussed financial market efficiency toward climate change in order to better manage related risks. Our work focuses on the topic of climate change risk in the stock market. We use long-term trends of a newly released climate index, Actuaries Climate Index (ACI), as proxies for climate change risk. As a type of production risk, ACI trends have an adverse impact on the agricultural production and corporate profitability of agriculture-related companies. We find significant predictability of climate change risk on corporate profits. This motivates us to further test the predictability of the ACI on stock returns. We construct a risk-adjusted stock trading strategy that adjusts to climate change risk. With a one-year holding period, our non-overlapping strategy earns positive returns with zero cost at the beginning over a 26-year test period. The outperformance suggests the predictive ability of the ACI and creates potential arbitrage opportunities in the stock market. Thus, the stock market is believed to be inefficient toward climate change risk. We get similar results and conclusions for different versions and extensions of the non-overlapping strategy. However, these conclusions are no longer attainable when we look at strategy returns in shorter periods. From subsample tests, we find that our strategy performs considerably well in terms of abnormally positive returns before 2015. But the predictability on stock returns degenerates quickly over a short period of time in 2017. This "overturn" of market inefficiency highlights the importance of follow-up studies and we suggest that future research could be devoted more toward discovering evidence about market efficiency and the impact of climate events on investors' attention toward climate change risk.

We investigate whether stock markets efficiently price risks brought on or exacerbated by climate change. We focus on drought, the most damaging natural disaster for crops and food-company cash flows. We show that prolonged drought in a country, measured by the Palmer Drought Severity Index (PDSI) from climate studies, forecasts both declines in profitability ratios and poor stock returns for food companies in that country. A portfolio short food stocks of countries in drought and long those of countries not in drought generates a 9.2% annualized return from 1985 to 2015. This excess predictability is larger in countries having little history of droughts prior to the 1980s. Our findings support regulatory concerns of markets inexperienced with climate change underreacting to such risks.

Canada has come through the pandemic relatively well and, as a commodity exporter, has been hit less hard than many other countries have been by Russia’s war on Ukraine. Nonetheless, inflation is well above target, housing affordability is a major concern following a long boom that may now have peaked, and the pandemic remains a source of risk.

Canada’s muted productivity growth during recent years has sparked concerns about the country’s investment climate. In this study, we develop a new natural language processing (NPL) based indicator, mining the richness of Twitter (now X) accounts to measure trends in the public perceptions of Canada’s investment climate. We find that while the Canadian investment climate appears to be generally favorable, there are signs of slippage in some categories in recent periods, such as with respect to governance and infrastructure. This result is confirmed by both survey-based and NLP-based indicators. We also find that our NLP-based indicators would suggest that perceptions of Canada’s investment climate are similar to perceptions of U.S. investment climate, except with respect to governance, where views of U.S. governance are notably more negative. Comparing our novel indicator relative to traditional survey-based indicators, we find that the NLP-based indicators are statistically significant in helping to predict investment flows, similar to survey-based measures. Meanwhile, the new NLP-based indicator offers insights into the nuances of data, allowing us to identify specific grievances. Finally, we construct a similar indicator for the U.S. and compare trends across countries.

The books deals with the questions that really matter for green finance: Where will the money to finance the transition to a low carbon environment come from, how far do the banks’ balance sheets stretch and where will the rest of the money come from? How much can we rely on the capital markets, especially in the EU, to get money to the parts of the economy which really need it, without greenwashing? How do governments organize not just a transition, but a just transition to a low carbon environment? Is it time to revisit received ideas about the proper role for central banks?

Summarizes the science of climate change and impacts on the United States, for the public and policymakers.

Climate change threatens the economy of the United States in myriad ways, including increased flooding and storm damage, altered crop yields, lost labor productivity, higher crime, reshaped public-health patterns, and strained energy systems, among many other effects. Combining the latest climate models, state-of-the-art econometric research on human responses to climate, and cutting-edge private-sector risk-assessment tools, Economic Risks of Climate Change: An American Prospectus crafts a game-changing profile of the economic risks of climate change in the United States. This prospectus is based on a critically acclaimed independent assessment of the economic risks posed by climate change commissioned by the Risky Business Project. With new contributions from Karen Fisher-Vanden, Michael Greenstone, Geoffrey Heal, Michael Oppenheimer, and Nicholas Stern and Bob Ward, as well as a foreword from Risky Business cochairs Michael Bloomberg, Henry Paulson, and Thomas Steyer, the book speaks to scientists, researchers, scholars, activists, and policy makers. It depicts the distribution of escalating climate-change risk across the country and assesses its effects on aspects of the economy as varied as hurricane damages and violent crime. Beautifully illustrated and accessibly written, this book is an essential tool for helping businesses and governments prepare for the future.

This monograph provides an overview of key papers in the corporate sustainability literature and directions for future research. It is structured on three key themes: measuring, managing and communicating corporate sustainability performance.