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

European Central Bank (ECB)

Federico Ramella

European Central Bank

Lavinia Rognone

University of Edinburgh 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

European Central Bank (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 Edinburgh Business School ( email )

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