Climate-Change Risk and Stocks’ Return

Abstract

We use a climate risk dataset generated by the Google BERT AI algorithm and refined by Kölbel et al. (2022) to assess the impact of climate on stock returns. Our findings show that physical climate risk is reflected in US stock markets with a positive and statistically significant premium of 1.5-2.9% per year, which cannot be attributed to other known risk factors or industry differences. There is no consistent premium related to climate transitional risk. The physical climate risk premium has grown stronger post-Paris Agreement, 3.0-4.0% per year, potentially due to increased investor attention to climate-related matters.

Keywords: Climate Change, Physical Climate Risk, Stocks' Return, Sustainable Investment, Green Premium

JEL Classification: G11, G12