Physical climate change risk and ESG green premium

Jiaqi Wang, Guojin Chen, Peilin Hsieh and Wenpeng Chen

Applied Economics, 2025, vol. 57, issue 56, 9516-9529

Abstract: We build an asset pricing model that incorporates climate change risk and firms’ ESG engagement to analyse their interactive effects on equity returns. Our model shows that a firm’s ESG engagement has three channels for influencing stock returns: its direct impact on resisting climate change risk, indirect reduction in systematic risk and attraction of green preference, and the empirical evidence shows that both risk–return relation and ESG engagement are priced. We also point out an inevitably negative and convex relation between the market Sharp Ratio and stocks market beta in an economy with climate change risk.

Date: 2025
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DOI: 10.1080/00036846.2024.2421456

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