Climate change, risk factors and stock returns: A review of the literature

This article reviews how climate change could be considered an additional source of market risk. I discuss the types of data needed to analyse the climate risk drivers that shape the dynamics of the equity market. I present empirical evidence at both the macro and micro-level, analysing whether and to what extent the equity market prices climate change and related risks. Top-down and bottom-up approaches are compared to understand which climate risk is more likely to affect the cross-section of stock returns, both within and across sectors. Emphasis is also placed on investors' beliefs about climate change risks, and the related asset pricing implications are analysed. I conclude by illustrating further directions for both empirical and theoretical research in the field of climate finance.

Automated summary

This article delves into how climate change could be a source of market risk, discussing the data needed to analyze climate risk drivers and how the equity market prices climate change and related risks. It compares top-down and bottom-up approaches to understand which climate risk is more likely to affect stock returns, and emphasizes on investors’ beliefs and asset pricing implications related to climate change risks. It concludes by suggesting further directions for empirical and theoretical research in climate finance.