28 January 2025
Over the past decade, rising concerns about global warming and climate-related risks have heightened interest in their financial market implications. Recent research suggests that climate risk is a systematic factor influencing stock returns. While strategies to hedge climate uncertainty remain underexplored, some studies propose de-carbonized equity portfolios. Lavinia Rognone and her co-authors expand the literature by examining the safe-haven potential of green assets, including green bonds, alongside precious metals, against transition and physical climate risks identified through textual analysis.
Key findings indicate that green bonds provide consistent safe-haven benefits for both types of climate risk, with positive time-varying correlations to climate risk proxies. This positions green bonds as effective tools for mitigating climate-driven uncertainty, which commands a risk premium in equity markets.
Climate risk impacts stock returns through two channels: physical risks, stemming from climate hazards disrupting operations and cash flows, and transition risks, arising from, e.g., costs associated with regulatory shifts toward low-carbon economies, primarily affecting energy-intensive industries. These risks have heterogeneous effects, and the non-diversifiable nature of climate risk underscores the importance of identifying assets that can hedge against these uncertainties, as investors increasingly demand compensation for climate risk exposures.
Read the full paper: Hedging climate risks with green assets
Full paper reference: Cepni, O., Demirer, R., and Rognone, L. “Hedging climate risks with green assets”. Economic Letters. Economics Letters, Volume 212, 2022.
Lavinia Rognone
Lecturer in Sustainable Finance, University of Edinburgh Business School
Oguzhan Cepni
Visiting Fellow, Centre for Business, Climate Change and Sustainability
Riza Demirer
Professor of Economics & Finance, Southern Illinois University Edwardsville