Transition versus physical climate risk pricing in European financial markets: a text-based approach

Under its climate regulation, the EU is expected to become the first continent with a net-zero emissions balance. We study the pricing of climate risks, physical and transition, within European markets. Using text-analysis, we construct two novel (daily) physical and transition risk indicators for the period 2005-2021 and two global climate risk vocabularies. Applying our climate risk indices to an asset pricing test framework, we document the emergence of economically significant transition and physical risk premia post-2015. From a firm-level analysis, using firms’ GHG emissions, GHG emissions intensity, environmental, and ESG scores, we find that rises in transition (physical) risk are typically associated…