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Green risk in Europe

Author

Listed:
  • Nuno Cassola

    (CEMAPRE, University of Lisbon, Portugal; Center for European Studies, University of Milano-Bicocca, Italy)

  • Claudio Morana

    (Center for European Studies, University of Milano-Bicocca, Italy; Rimini Centre for Economic Analysis; CeRP, Collegio Carlo Alberto, Italy)

  • Elisa Ossola

    (Center for European Studies, University of Milano-Bicocca, Italy; Rimini Centre for Economic Analysis)

Abstract

Climate change poses serious economic, financial, and social challenges to humanity, and green transition policies are now actively implemented in many industrialized countries. Whether financial markets price climate risks is critical to ensuring that the necessary funding flows into environmentally sound projects and that stranded assets risk is adequately managed. In this paper, we assess climate risks for the European stock market. We show that measures of returns spreads of green vs. brown investment might reflect climate risks and assets' exposition to systematic macro-financial risk factors. These latter factors should be filtered out to measure climate risks accurately. We show that climate risks are priced in the European stock market by focusing on aggregate, industry, and company-level data. We propose a market-based green rating procedure to evaluate non-transparent and non-disclosing companies for which ESG information is unavailable. We illustrate its implementation using a sample of over 800 non-transparent firms.

Suggested Citation

  • Nuno Cassola & Claudio Morana & Elisa Ossola, 2023. "Green risk in Europe," Working Paper series 23-14, Rimini Centre for Economic Analysis, revised Jun 2024.
    • Handle: RePEc:rim:rimwps:23-14
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Climate risk; environmental disclosure; macro-finance interface; asset pricing models; European Union;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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