Introduction

The report analyses how financial markets incorporate carbon-transition risk into asset pricing. It highlights that equity markets show heterogeneous responses to transition exposure depending on country, sector, and regulatory environment. Transition risk is defined as the market impact of policies, technological shifts, and behavioural changes needed to achieve decarbonisation.

Data and methodology

The study uses a global sample of firms from 2005–2019, combining financial data with carbon emissions, sector classifications, and country-specific climate policies. Transition exposure is measured through direct and indirect emissions, as well as sensitivity to carbon pricing. Statistical models estimate the relationship between firm-level returns and carbon-transition risk across regions.

Results: global evidence

Findings indicate that global equity markets price carbon-transition risk, but the extent differs across geographies. Firms with higher carbon intensity experience lower valuations and higher cost of capital. A one standard deviation increase in carbon exposure corresponds to a measurable decline in price-to-book ratios and equity returns.

Transition risk is most consistently priced in Europe, reflecting more stringent climate policies and investor awareness. In North America, evidence of pricing is weaker but has strengthened since the Paris Agreement. In Asia, markets show mixed outcomes, with pricing effects varying by country and policy commitment.

Results: sectoral analysis

Carbon-intensive industries, particularly energy, utilities, and materials, face stronger transition-related repricing than low-emission sectors. Within sectors, firms with credible transition plans or lower emissions intensity face smaller discounts. Financial institutions exhibit moderate pricing effects, mainly through their exposure to high-emission borrowers and assets.

Role of carbon pricing and policy

The presence of explicit carbon pricing schemes amplifies the pricing of transition risk. In countries with emissions trading systems or carbon taxes, the link between firm emissions and valuations is stronger. Policy credibility and stability are key factors in market pricing, with temporary or inconsistent measures showing weaker effects.

The Paris Agreement in 2015 is identified as a turning point, with a noticeable increase in the pricing of transition risk globally. Markets began differentiating more sharply between high- and low-carbon firms after this period.

Implications for investors and policymakers

Investors are advised to integrate transition risk into portfolio construction, particularly by assessing firms’ exposure to future carbon pricing and regulatory change. The findings suggest that ignoring transition risk can lead to mispricing and long-term underperformance.

For policymakers, the evidence supports the importance of stable and credible climate policies in ensuring markets correctly internalise transition risks. Clear carbon pricing mechanisms are shown to enhance transparency and risk allocation across sectors.

Conclusion

The study concludes that while transition risk is increasingly priced into global equity markets, the extent is uneven across regions and sectors. Stronger evidence is found in jurisdictions with credible carbon policies and in carbon-intensive industries. The report underscores the importance of integrating transition considerations into financial analysis, investment decisions, and policy frameworks.