Understanding climate risk in finance: from asset pricing to green investment strategies

This study explores the role of climate risk in finance and asset pricing by reviewing how climate-related risks are defined, measured, and transmitted across financial markets. Combining a narrative synthesis with bibliometric evidence from a co-occurrence network of 130 academic contributions, we examine the most widely used firm- and country-level proxies for climate risk, including emissions, ESG ratings and environmental scores, physical climate indicators, and text-based climate risk indices. We also review the main theoretical models that explain the economic rationale behind climate-related premia, together with the standard empirical methodologies used to test whether these premia are reflected in asset prices, including portfolio-sorting approaches. While the review focuses primarily on equity markets and stock returns, it also considers broader dimensions such as fixed-income markets, sovereign risk, and financial stability. The study highlights the key methodological limitations in the literature and provides a structured roadmap for future research on climate risk and financial markets.