The pricing of environmental risk: an empirical analysis of the European industry portfolios

Nuno Cassola, Claudio Morana and Elisa Ossola

Chapter 10 in Handbook of Climate Change and Financial Markets, 2026, pp 162-185 from Edward Elgar Publishing

Abstract: This chapter assesses the pricing of climate risks in European financial markets within the context of the European Green Deal and EU Taxonomy, which guide the sustainability of economic activities. It addresses the critical issue of whether EU financial markets are accurately pricing climate risks, a stream of the literature showing conflicting evidence. Based on the greenness and transparency factor of Alessi et al. (2021), we test the hypothesis of no climate risk pricing in European industry portfolios. Through multifactor asset pricing models, the time series analysis reveals that climate risks are statistically significant and negatively priced, particularly in high carbon/brown sectors. This finding suggests that portfolio managers increasingly consider the distinction between brown and green investments. However, while rejecting the null hypothesis implies that climate risks are priced, it does not confirm the efficiency of this pricing in fully reflecting transition and physical risks.

Keywords: Climate risk; Environmental disclosure; Industry portfolios; Unconditional factor models; Asset pricing; European Union (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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