Transition Versus Physical Climate Risk Pricing in European Financial Markets: A Text-Based Approach

45 Pages Posted: 25 Jan 2022 Last revised: 6 Jul 2022

See all articles by Giovanna Bua

Giovanna Bua

European Central Bank (ECB)

Daniel Kapp

ECB

Federico Ramella

European Central Bank

Lavinia Rognone

University of Manchester - Alliance Manchester Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2021

Abstract

This paper studies the pricing of climate-risks in European equity markets. Using text-analysis, we construct two novel physical and transition risk indicators for the period 2005-2021. Our results document the emergence of economically significant transition and physical risk premia post-2015. We investigate which information investors use as a gauge for firms’ exposure to climate-risks running a firm-level analysis, using firms’ GHG emissions, environmental, and ESG scores, and a sectoral-analysis. While firm-level information appears to be used as a proxy for firms’ climate-risks exposure, especially for transition risk since 2015, the sectoral classification appears to proxy firms’ exposures to physical risk.

Keywords: Climate risk premia, Transition risk, Physical risk, Text analysis

JEL Classification: C58, G12, G14, G28, Q51

Suggested Citation

Bua, Giovanna and Kapp, Daniel and Ramella, Federico and Rognone, Lavinia, Transition Versus Physical Climate Risk Pricing in European Financial Markets: A Text-Based Approach (June 4, 2021). ECB Working Paper No. 2677, Available at SSRN: https://ssrn.com/abstract=3860234 or http://dx.doi.org/10.2139/ssrn.3860234

Giovanna Bua

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Daniel Kapp

ECB ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Federico Ramella

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lavinia Rognone (Contact Author)

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

HOME PAGE: http://https://www.research.manchester.ac.uk/portal/lavinia.rognone.html

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