Market efficiency and climate change

Alexandre C. Köberle, Sascha Dobbertin and João Amaro de Matos

Chapter 8 in Handbook of Climate Change and Financial Markets, 2026, pp 128-149 from Edward Elgar Publishing

Abstract: Understanding whether markets efficiently price climate-related risk is critical to policy design and business strategy by financial institutions (FIs). New knowledge about climate change and societal responses to it is constantly evolving, and its assimilation is hampered by the ability of financial institutions to interpret the complexities involved. Combinations of climate-related drivers can propagate to FIs via defaults and value loss, which, if large enough and widespread, can trigger financial crises. The likelihood of large-scale risks materializing depends not only on the likelihood of these events happening but also on the degree to which markets already price these risks. Despite indications that markets are beginning to price climate risks, they are doing so inconsistently; the extent of pricing varies across markets and time, and there is evidence of potential market inefficiencies. This chapter examines the efficient market hypothesis in light of emerging climate-related risks. We explore reasons for barriers to the effective absorption of available information by financial markets into actionable insights. We find that the complexity and uncertainty of climate-related information, lack of standardization, regional and sectoral specificities, and natural variability of weather patterns all play a role, as do behavioral biases and short-termism by financial actors. We critically examine the intersection of the efficient market hypothesis and the incorporation of climate-related information into financial markets by providing a comprehensive review of existing methodologies that seek to quantify and integrate climate risks into market pricing mechanisms. We close with a discussion on the challenges posed by the constantly evolving nature of climate-related risks (and opportunities) and the previously unseen manifestations of a changing climate on the physical risk side and, on the transition risk side, of the deep and fast structural changes required to mitigate them.

Keywords: Climate finance; Efficient market hypothesis; Climate risk (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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