Climate uncertainty and information transmissions across the conventional and ESG assets

Oguzhan Cepni (Corresponding), Riza Demirer, Linh Pham, Lavinia Rognone

Research output: Contribution to journalArticlepeer-review


This paper examines the effect of climate uncertainty on the spillover effects across the European conventional and environmental, social, and governance (ESG) financial markets via novel measures of physical and transitional climate risk proxies obtained from textual analysis. Analyzing daily data for stocks in the MSCI Europe ESG Leaders Index and various Euro based ESG bond indexes over the period January 3, 2014 – September 30, 2021, we show that the shock transmissions between the conventional and ESG assets are significantly lower during periods of high climate uncertainty, suggesting that ESG investments can offer conventional investors diversification benefits against climate-driven shocks. Further comparing a forward-looking investment strategy conditional on the level of climate risk against the passive investment strategy, we show that investors who are worried about physical climate risks could utilize ESG equity sector portfolios as a diversification tool against physical climate uncertainty. In contrast, ESG bonds are found to be particularly useful in managing transition risk exposures that are associated with policy uncertainty and/or business transitions with respect to environmental policies. The findings have important implications regarding the role of climate uncertainty as a driver of informational spillovers across the conventional and ESG assets with important insights to manage climate risk exposures.
Original languageEnglish
Article number101730
JournalJournal of International Financial Markets, Institutions and Money
Early online date6 Jan 2023
Publication statusPublished - 1 Mar 2023


  • Climate risk
  • ESG investment
  • Dynamic connectedness
  • Hedging


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