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●Climate risk become increasingly apparent, climate change poses risks for investors and the financial system
●Climate risks to the financial system and investors are profound and can be divided into two parts(Financial Stability Board, 2017):
1.Transition Risk: Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change
2.Physical Risks: resulting from climate change can be event-driven (acute) or longer-term shifts (chronic) in climate patterns
On a Macro Level:
●Climate change is accelerating:
1.Of the seventeen warmest measured years since recordkeeping began in 1880, sixteen have occurred since 2001.
2.The rising temperature, climbing sea levels and the retreat of ice sheets and glaciers, and the increasing frequency of droughts and floods reflect a changing climate and increasing atmospheric carbon levels.
●Policymakers and institutional investors worldwide are increasingly concerned about the impact of climate change risks:
●Corporations that need to balance between long-term sustainability and short-time high-level profits are central participants in the financial system
a.Supply chain disruptions and asset damages caused by natural disasters (e.g., hurricanes, floods)
b.Productivity and demand decline due to physical impacts (e.g., sea-level rise, extreme warm/cold)
c.Risks and opportunities related to the transition to a lower-carbon economy (e.g., emission regulation, technology innovation, renewable energy, reputation)
●Do Climate Risk Shocks Affect Firm’s Perception of Climate Physical and Regulatory Risk
●Basic Analysis:
↓Influence
●In specific:
●Investors gradually recognised the decisive position of climate risks in recent years (Krueger et al.,2020; Painter,2020; Bolton and Kacperczyk,2021; Faccini et al.,2021)
Meanwhile…
●Recent literature has progressed adequately in understanding the effects of climate change on asset prices and firms’ performance(Engle et al., 2020; Bolton et al., 2021; Faccini et al.,2021; Ilhan et al., 2021; Sautner et al., 2021; Li and Yu, 2021)
On Macro-level
On Micro-level
●Several various classifications of climate risks are potentially priced in asset markets, and these multiple risks often do not materialize at one time(Giglio et al., 2021a)
e.g. Hurricane, Tsunami
e.g. Carbon tax, Technological advances
●Response to physical and transition risks could be the threat or opportunity in asset markets(In et al., 2019; Pástor et al., 2020; Görgen et al., 2020; Ilhan et al., 2021; Ardia et al., 2020; Pástor et al. 2022; Aswani et al., 2022)