Climate change has profoundly shaped the modern view of finance. The Climate Finance research can be typically broken down into two categories; direct and indirect.
The direct climate change effects, which are related to changes in weather patterns (e.g., heavy-storms, more frequent heatwaves, and increasing global temperature), can deplete labour productivity and reduce food production and thus increase the overall climate change risk. In turn, heightened climate change risk can alter the perception of investors about the financial markets. Investors are concerned about an imminent increase in energy demand because firms would spend more in order to maintain standard working conditions. Moreover, weather shocks act as a systematic negative productivity shock, which will eventually affect the stock valuations. Finally, evidence from psychological literature shows that changes in weather patterns affect investors’ mood.
The indirect impact of climate change can be observed in the financial markets in the form of Climate Policy. Policy-makers make an effort to stabilise rising global temperatures by regulating the carbon emissions of firms. For example, European emission trading scheme is a market for reducing firms’ emissions. Emissions have been financialised as commodities and are exchanged in a cap and trade system. Cap and trade system indicates that the quantity of emissions has to be capped, otherwise the polluters will be penalised. Therefore, firms place particular emphasis on reducing their carbon footprint. For this reason, there is an increasing volume of funds allocated to greens investments (e.g clean-tech). Firms benefit from this type of investments in three ways; first, they comply with the regulatory limits, second social investors would reward environmental sensitive firms and third firms establish long-term objectives, which can potentially lead them to gain and sustain a competitive advantage.
- Climate forecasting
- Pricing energy and environmental products
- Environmental strategy and policy
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