Unhedgeable Risk: How Climate Change Sentiment Impacts Investment

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While the most significant physical impacts of climate change will probably be seen in the second half of this century, financial markets could be affected much sooner, driven by the projections of likely future impacts, changing regulations, and shifting market sentiments.

This study employs a unique approach to address these short-term implications of the longer-term climate challenge, in relation to climate risk. The complex analysis presented here is the result of a collaborative effort between research entities within the University of Cambridge, namely the Cambridge Centre for Risk Studies (CRS), the Centre for Climate Mitigation Research (4CMR) and the Cambridge Judge Business School.

This study quantifies the potential financial impacts of a shift in market sentiment driven by significant changes in investor and consumer beliefs about the future effects of climate change, modelling the impact of three market sentiment scenarios on four portfolios with different asset allocations.