Climate transition risks, ESG sentiment and market value: Insights from the European stock market

Brahim Gaies, Najeh Chaâbane, Opeoluwa Adeniyi Adeosun and Jean-Michel Sahut

Energy Economics, 2025, vol. 148, issue C

Abstract: This study explores the links between climate transition risks, ESG sentiment and stock prices in the European context. It provides novel insights into the literature of sentiment-related stock markets, ESG's impact on firm market value, and climate-related financial analysis. Using an advanced methodology, including the time-varying parameter vector autoregressive (TVP-VAR) connectedness method and the quantile coherency technique, we uncover key findings on how ESG sentiment influences market behavior in the face of climate transition risks. Our main results indicate that European stock markets are highly vulnerable to climate transition risks, with sentiment acting as a key transmission channel. While positive ESG sentiment improves market valuation during stable periods, its effect weakens in times of market distress. Conversely, negative ESG sentiment strongly amplifies climate transition risk during both stable and unstable periods, dampening market enthusiasm and exacerbating market declines during instability. These effects persist through robustness tests, including an analysis of market volatility and a comparative study with the US context, where ESG uncertainty plays a key destabilizing role.

Keywords: ESG sentiment; Climate transition risks; European stock markets; TVP-VAR; Quantile coherency; Financial instability (search for similar items in EconPapers)
JEL-codes: G12 G14 M14 Q54 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:148:y:2025:i:c:s0140988325004323

DOI: 10.1016/j.eneco.2025.108605

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