Climate uncertainty and information transmissions across the conventional and ESG assets

• DOI: 10.1016/j.intfin.2022.101730
• Publication Date: 2023-01-06T16:51:51Z
• Authors: Oguzhan Cepni; Riza Demirer; Linh Pham; Lavinia Rognone
• Keywords: Climate risk; Equity; Spillover effect; Climate Finance

This paper examines the effect of climate uncertainty on spillover effects across European conventional and environmental, social, governance (ESG) financial markets via novel measures physical transitional risk proxies obtained from textual analysis. Analyzing daily data for stocks in MSCI Europe ESG Leaders Index various Euro based bond indexes over period January 3, 2014–September 30, 2021, we show that shock transmissions between assets are significantly lower during periods high uncertainty, suggesting investments can offer investors diversification benefits against climate-driven shocks. Further comparing a forward-looking investment strategy conditional level passive strategy, who worried about risks could utilize equity sector portfolios as tool uncertainty. In contrast, bonds found to be particularly useful managing transition exposures associated with policy and/or business transitions respect environmental policies. The findings have important implications regarding role driver informational spillovers insights manage exposures.