Beliefs about climate risks and market efficiency

Caterina Santi

Chapter 7 in Handbook of Climate Change and Financial Markets, 2026, pp 111-127 from Edward Elgar Publishing

Abstract: Climate change is poised to remain a significant concern in our society in the near future. Financial markets are essential to direct our economy toward sustainability for several reasons. First, they can steer resources toward optimal societal and environmental uses. Second, environmentally conscious shareholders can push managers to put in place more sustainable practices. Third, asset prices signal exposure to climate change risks in efficient markets. Nonetheless, the uncertainty about the extent and timing of the effects of climate change on our economies, as well as the uncertainty of climate policies, can lead to market inefficiencies. Therefore, understanding investors’ beliefs about climate change becomes essential as they not only shape the valuation of assets sensitive to climate change but also significantly influence the funding of innovations for climate mitigation. This chapter begins with examining existing literature on the beliefs regarding climate change held by retail and institutional investors. Subsequently, I discuss the theoretical and empirical literature addressing the pricing of climate risks across various asset classes, including equities, fixed-income securities, and real estate. Within this framework, I explore the implications for market efficiency. The chapter concludes by proposing promising avenues for future research in the field of climate finance.

Keywords: Climate beliefs; Climate risks; Asset pricing; Market efficiency (search for similar items in EconPapers)
Date: 2026
ISBN: 9781035340415
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