A0785
Title: Environmental performance and market risk: A data-driven approach
Authors: Arianna Agosto - University of Pavia (Italy) [presenting]
Paola Cerchiello - University of Pavia (Italy)
Alessandra Tanda - Universita degli Studi di Pavia (Italy)
Abstract: The aim is to investigate how environmental performance and climate risk influence market returns and systemic risk. The data-driven environmental performance index (DDEPI) is introduced, a country-level metric constructed using robust principal component analysis (RobPCA). Unlike traditional indices with expert-defined weights, DDEPI is built on empirical data, focusing on variables that account for the largest share of variance, dynamically reflecting variable interrelations across countries and over time. The predictive power of DDEPI is assessed on asset return dynamics, conditional on firm-level ESG ratings and financial indicators. Furthermore, using systemic risk measures such as conditional value-at-risk (CoVaR), it is explored how environmental and climate risks exacerbate firms' exposure to systemic financial shocks. To incorporate physical climate risk, the models are enriched with a novel metric derived from the application of multivariate count time series models that captures the persistence and interdependence of climate-related shocks across sectors and regions. Findings offer new insights into the financial implications of sustainability and environmental issues in market risk assessment.
