Do stock returns respond to physical and transition climate risks? Evidence from emerging BRICS economies

Abstract

This study examines how stock market returns in emerging BRICS economies respond to growing physical and transition climate risks. To capture the physical climate risk, we use the frequency of natural disasters, the number of people affected by natural disasters, temperature anomaly, and precipitation anomaly. For transition risk, we included two climate-policy uncertainty measures. First, we conduct a panel-level analysis using a cross-sectionally augmented autoregressive distributed lag model. Second, for country-level analysis, we applied the augmented autoregressive distributed lag model to the monthly dataset from January-2000 to March-2023. The empirical results show that an increase in transition climate risk causes a significant and negative shock to stock returns, both in the short- and long-term in the panel and across each BRICS country. Second, we find that physical climate risk indicators have a significant and negative impact on stock returns in China, India, and South Africa, but not in Brazil or Russia. We conclude that the impact of physical climate risk on stock returns is country-specific, and that the impact of transition climate risk is widespread. These findings provide important insights for investors, regulators, hedgers, portfolio managers, and policymakers regarding policy formulation and future investment strategies.

Keywords: BRICS countries; Climate risk; Natural disasters; Physical climate risk; Stock returns; climate policy uncertainty; transition climate risk.