Climate Finance

TLDR

The article reviews literature on climate change and financial markets, examines how investors can use climate‑related assets to hedge climate risk, and proposes future research directions. The authors discuss methods for incorporating climate risk into macrofinance models and review empirical studies on pricing climate risks across real estate, equities, and fixed‑income securities.

Abstract

In this article, we review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macrofinance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes, including real estate, equities, and fixed income securities. In this context, we also discuss how investors can use these assets to construct portfolios that hedge against climate risk. We conclude by proposing several promising directions for future research in climate finance.