A0211
Title: Green risk in Europe
Authors: Claudio Morana - Universita di Milano Bicocca (Italy) [presenting]
Abstract: To define a more stable measure of greenness, the sources of climate risk are studied by decomposing a greenness and transparency portfolio proposed previously. The latter defines a factor on firm emissions and environmental transparency, priced in the European market. The risk information contained within an asset pricing model is then dissected by conditioning on some relevant macro-financial factors, describing key stylized facts for the euro area economy, and providing an accurate measure of systematic risk. Operationally, the greenness and transparency factor is broken down into parts associated with medium to long-term and short-term macro-financial interactions, which carry clear-cut economic interpretations and a residual idiosyncratic green risk component. This approach disentangles environmental risks remuneration, as delivered by the residual component, from other sources, such as those associated with the business and financial cycles, secular macro-financial developments, or systematic economic policies reflected in the medium to long-term and short-term components. Stocks' responses are then investigated to the different risk sources within this context, to provide a market-based assessment of the greenness of listed companies based on their beta response to green risk.
