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
Date Written: June 4, 2021
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
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