ABSTRACT The accelerating transition to a low‐carbon economy is an increasingly significant source of financial risk for greenhouse gas (GHG)‐intensive companies, especially in countries with strong climate policies, such as those in Europe. How much financial markets actually understand and price these climate transition risks is unclear. This study seeks to fill that gap by examining the reaction of European equity portfolios composed of GHG‐intensive companies in the STOXX Europe 600 Index to climate transition risk from November 2012 to December 2023. Using a Bayesian econometric approach, this analysis applies to the Transition Risk Index, which measures narratives about climate policy found in financial media as an advanced indicator of investor sentiment toward transition risk. The results reveal a time‐varying, sector‐specific relationship between climate transition risk and returns for portfolios intensive in greenhouse gases. Shocks from transition risks create economically meaningful but temporary effects on valuation; however, the timing and size of responses differ across sectors. Emissions‐intensive sectors that are directly exposed to regulation experience earlier and larger short‐run declines than other GHG‐intensive sectors, which adjust more gradually. These effects are significant because they go away after several months—this means that transition risk shows up through short‐term repricing instead of long‐term underperformance. The results make clear the importance of climate transition risk for managing portfolio risks over the short to medium term and for deciding on sector allocations, providing information that investors and policymakers can use about how signals from climate policy travel through European equity markets.
Olasehinde‐Williams et al. (Thu,) studied this question.