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Let’s get physical: Comparing metrics of physical climate risk

Author

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  • Hain, Linda I.
  • Kölbel, Julian F.
  • Leippold, Markus

Abstract

Investors and regulators require reliable estimates of physical climate risks for decision-making. While assessing these risks is challenging, several commercial data providers and academics have started to develop firm-level physical risk scores. We compare six physical risk scores. We find a substantial divergence between these scores, also among those based on similar methodologies. We show how this divergence could cause problems when testing whether financial markets are pricing physical risks. Hence, financial markets may not adequately account for the physical risk exposure of corporations using available risk scores. Finally, we identify key sources of uncertainty for further investigation.

Suggested Citation

  • Hain, Linda I. & Kölbel, Julian F. & Leippold, Markus, 2022. "Let’s get physical: Comparing metrics of physical climate risk," Finance Research Letters, Elsevier, vol. 46(PB).
    • Handle: RePEc:eee:finlet:v:46:y:2022:i:pb:s1544612321004013
    DOI: 10.1016/j.frl.2021.102406
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    References listed on IDEAS

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    Cited by:

    1. Braun, Alexander & Braun, Julia & Weigert, Florian, 2023. "Extreme weather risk and the cost of equity," CFR Working Papers 23-08, University of Cologne, Centre for Financial Research (CFR).
    2. Gourdel, Régis & Sydow, Matthias, 2023. "Non-banks contagion and the uneven mitigation of climate risk," International Review of Financial Analysis, Elsevier, vol. 89(C).
    3. Vestrelli, Roberto & Fronzetti Colladon, Andrea & Pisello, Anna Laura, 2024. "When attention to climate change matters: The impact of climate risk disclosure on firm market value," Energy Policy, Elsevier, vol. 185(C).
    4. Giacomo Bressan & Anja Đuranović & Irene Monasterolo & Stefano Battiston, 2024. "Asset-level assessment of climate physical risk matters for adaptation finance," Nature Communications, Nature, vol. 15(1), pages 1-13, December.

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    More about this item

    Keywords

    Climate change; Physical risk scores; Disagreement; Model uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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