CefES Working Papers

Green risk in Europe

by Nuno Cassola (University of Lisbon), Claudio Morana (University of Milano-Bicocca) and Elisa Ossola (University of Milano-Bicocca)


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 within the context of Alessi et al. (2023) greenness and transparency factor. 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, which might be of particular interest 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.