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Transition Risk to a Low-Carbon Economy and the Effects on Financial Markets

A special issue of Sustainability (ISSN 2071-1050). This special issue belongs to the section "Economic and Business Aspects of Sustainability".

Deadline for manuscript submissions: closed (10 August 2023) | Viewed by 9407

Special Issue Editors

Department of Management, Economics and Industrial Engineering, Politecnico di Milano, 20156 Milan, Italy
Interests: systemic risk; climate finance; complex systems
Department of Statistics, University of Bologna, 40126 Bologna, Italy
Interests: financial econometrics; climate econometrics; time series analysis; extreme value analysis
Special Issues, Collections and Topics in MDPI journals

Special Issue Information

Dear Colleagues,

Climate change raises the urgency of committing to climate transition and the related risks. Climate-related risks and their transmission mechanisms could affect economic entities by generating higher costs of doing business and increasing the market volatility of asset values. Although financial markets can contribute to an orderly transition to a low-carbon economy, transition risk can influence investment decisions and pose significant threats to financial stability.  The aim of this Special Issue is to promote research on the transition risk to a low-carbon economy and its consequences for financial markets and market players. In particular, this Special Issue focuses on research related to sustainable finance and financial innovation and how they interact with financial markets, the evaluation of investments and risk management procedures.  We invite both theoretical and empirical papers and encourage researchers from multiple disciplines to submit manuscripts. Topics of interest include (but are not limited to): 

  • Climate change and adaptation finance;
  • Climate econometrics and financial innovation;
  • The effect of CSR on financial risks;
  • Environmental and social impact analysis and the evaluation of investments;
  • ESG metrics for portfolio allocation;
  • EU taxonomy and portfolio allocation;
  • Forecasting transition risk;
  • Green bonds;
  • Greenium;
  • Greenwashing in capital markets;
  • Hedging transition risk;
  • Long-term investors and transition risk;
  • Management of stranded assets;
  • Quantitative measurement of transition risk;
  • Sustainable finance solutions for the transition to a low-carbon economy;
  • Transition risk and commodity markets;
  • Transition risk and financial networks;
  • Transition risk and financial regulation;
  • Transition risk and fintech;
  • Transition risk and systemic risk;
  • Venture capital and green finance.

Dr. Andrea Flori
Dr. Luca Trapin
Guest Editors

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Sustainability is an international peer-reviewed open access semimonthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 2400 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

  • climate econometrics
  • climate finance
  • financial innovation
  • financial markets
  • low-carbon economy
  • portfolio allocation
  • risk management
  • sustainable finance
  • transition risk.

Published Papers (6 papers)

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Research

16 pages, 25390 KiB  
Article
Does Climate Change News Matter?
Sustainability 2023, 15(18), 13865; https://doi.org/10.3390/su151813865 - 18 Sep 2023
Viewed by 565
Abstract
We explore the importance of climate change as a news topic and examine the relationship between climate change news and financial returns using a large news database that consists of more than 4 million news stories. We use multinomial inverse regression—a Bayesian approach [...] Read more.
We explore the importance of climate change as a news topic and examine the relationship between climate change news and financial returns using a large news database that consists of more than 4 million news stories. We use multinomial inverse regression—a Bayesian approach capable of handling the multi-dimensionality of our data—to translate news into a quantifiable input. We also build a climate change dictionary from different sources to identify climate change related words. We find that climate change is a persistent topic in our news universe, which indicates that it is a relevant news topic. This relevance is supported by the non-zero contribution of climate change related trigrams (CCRTs) in the constructed news index. However, our sample does not show an increasing trend of the relative daily presence of CCRTs, which signals that the news are unlikely the source that furthers the perceived increasing awareness of climate change. Lastly, we determine the salient CCRTs present during good and bad days of the market. This result highlights the presence in the news of topics related to fuel and energy, emission, climate change, disaster, and fiscal policy. Full article
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16 pages, 269 KiB  
Article
Carbon Emissions Announcements and Market Returns
Sustainability 2023, 15(13), 10385; https://doi.org/10.3390/su151310385 - 30 Jun 2023
Cited by 1 | Viewed by 939
Abstract
The paper investigates the impact of carbon emissions on stock price returns of European listed firms. This relationship is assessed across all three emissions scopes, as well as using expectations to detect if future emissions impact contemporary returns. Our findings show that firms [...] Read more.
The paper investigates the impact of carbon emissions on stock price returns of European listed firms. This relationship is assessed across all three emissions scopes, as well as using expectations to detect if future emissions impact contemporary returns. Our findings show that firms with higher expected future emissions deliver lower contemporary returns after controlling for market capitalization, profit and other known return predictors. This result is statistically significant in the post Paris Agreement period for two- to three-year expectations of Scope 2 emissions. However, there is marginal to no significant negative relationship between current emissions and current returns. Overall, the results suggest that more environment-minded investors look further ahead and would expect lower returns from a polluting firm compared to a firm with no carbon emissions after the Paris Agreement. Full article
21 pages, 5910 KiB  
Article
Third Time’s a Charm? Assessing the Impact of the Third Phase of the EU ETS on CO2 Emissions and Performance
Sustainability 2023, 15(8), 6394; https://doi.org/10.3390/su15086394 - 08 Apr 2023
Cited by 1 | Viewed by 1754
Abstract
The EU Emissions Trading System (ETS) is the largest cap-and-trade scheme for CO2 emissions globally. This study evaluates the impact on CO2-equivalents emission of the increased stringency of Phase 3, which marked a significant shift from the previous phases of [...] Read more.
The EU Emissions Trading System (ETS) is the largest cap-and-trade scheme for CO2 emissions globally. This study evaluates the impact on CO2-equivalents emission of the increased stringency of Phase 3, which marked a significant shift from the previous phases of the EU ETS and significantly reduced the number of emissions permits (EU Allowances—EUA) freely allocated. Our analysis reveals that the increase of purchased EUA had a statistically significant, substantial impact on emissions reduction from Phase 2 to Phase 3, with a decrease in emissions of approximately half a ton for each additional allowance bought. Our (conservative) estimate of the total reduction in emission is 422 MtCO2-eq, 22.5% of the average yearly EU ETS emissions or 4.3–3.0% of emissions in Phases 2 and 3, respectively. Under Article 10c of the ETS directive, lower-income Member States have been allowed to continue the free allocation of EUA to electricity-generating installations during Phase 3 to provide more time and resources for modernization. We show that such derogation had a sizeable and significant detrimental impact on the achievement of emission reduction targets, leading to an increase in emissions of about half a ton for each additional allowance bought; a result that highlights the need for increased efforts on support measures (e.g., the Modernization Fund). We also investigate the impact of the EU ETS on output, capital productivity, and labour productivity. Our analysis indicates that the performances were not negatively impacted by the tightening in regulation that occurred between Phases 2 and 3. We also find no evidence that the derogation status impacted performances, which further ameliorates the concerns about the potential intra-EU competitive distortions induced by the regulation. Our results cast a favourable light on the reduction of the free allocation of EUA and the tightening of the regulation implemented in Phase 4 of the EU ETS. Full article
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17 pages, 513 KiB  
Article
An Empirical Approach to Integrating Climate Reputational Risk in Long-Term Scenario Analysis
Sustainability 2023, 15(7), 5886; https://doi.org/10.3390/su15075886 - 28 Mar 2023
Viewed by 1194
Abstract
We propose an empirical approach to estimate the impact of climate transition risk on corporate revenues that specifically accounts for reputational risk. We employ the information on disclosed Scope 3 emissions to proxy companies’ carbon footprint along the value chain. A threshold regression [...] Read more.
We propose an empirical approach to estimate the impact of climate transition risk on corporate revenues that specifically accounts for reputational risk. We employ the information on disclosed Scope 3 emissions to proxy companies’ carbon footprint along the value chain. A threshold regression is employed to identify the emission level above which reputational risk impacts revenues, and we link this impact to a climate policy stringency indicator. We estimate the threshold regression on a sample of companies within the European Union (EU), and find the threshold at around the 70th percentile of the Scope 3 emissions distribution. We find that companies with Scope 3 emissions beyond the threshold experienced substantially lower revenue growth as climate policies have become more stringent, compared to other companies. Full article
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16 pages, 883 KiB  
Article
How Does Green Finance Affect the Sustainable Development of the Regional Economy? Evidence from China
Sustainability 2023, 15(4), 3776; https://doi.org/10.3390/su15043776 - 18 Feb 2023
Cited by 3 | Viewed by 1828
Abstract
The continuous expansion of green finance makes it a new scheme to stimulate economic vitality, but its stimulation path remains to be explored. Using the panel data of 30 regions in China from 2016 to 2020, this research utilized an entropy method to [...] Read more.
The continuous expansion of green finance makes it a new scheme to stimulate economic vitality, but its stimulation path remains to be explored. Using the panel data of 30 regions in China from 2016 to 2020, this research utilized an entropy method to evaluate green finance and the sustainable development of the regional economy (SDRE), and then discussed their coupling coordination relationship and regional heterogeneity. The results show that: (1) The developments of green finance and SDRE in the eastern coastal regions are generally better than that of China’s inland regions. (2) If green finance and SDRE are at a high level, their coupling coordination will be enhanced. Otherwise, the coordination effect will be weakened. (3) The influence of green finance on SDRE has evident regional heterogeneity, and the influence is positive in the echelon with a high degree of green finance. Full article
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15 pages, 337 KiB  
Article
How Do Investors Value Sustainability? A Utility-Based Preference Optimization
Sustainability 2022, 14(23), 15963; https://doi.org/10.3390/su142315963 - 30 Nov 2022
Viewed by 1782
Abstract
We investigate how an investor’s preference for sustainable assets in the portfolio varies for differing levels of risk aversion. Using a sample of 411 publicly listed firms in the S&P 500, we calculate financial and sustainability returns, on which the investor’s utility depends. [...] Read more.
We investigate how an investor’s preference for sustainable assets in the portfolio varies for differing levels of risk aversion. Using a sample of 411 publicly listed firms in the S&P 500, we calculate financial and sustainability returns, on which the investor’s utility depends. We approximate the investor’s preference by the exponential and s-shaped utility function and optimize with regard to the sustainability preference. We find that with increasing levels of risk aversion, both minimum-variance and maximum Sharpe ratio type investors seek to incorporate sustainable assets in the portfolio. Full article
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