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Cited by 1,489Sustainable Finance and Green BondsFinancial Markets and Investment StrategiesRisk Management in Financial Firms

Hedging Climate Change News

Engle, Robert F, Giglio, Stefano, Kelly, Bryan, Lee, Heebum, Stroebel, Johannes·2020·The Review of Financial Studies
DOI 10.1093/rfs/hhz072
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Abstract

We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk.

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Crossref · 10.1093/rfs/hhz072

Cites

25 of 25 references verified0 citation errors · 0 not checkable

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  • Firms with better ESG performance have lower exposure to climate risk and earn lower returns, consistent with increased investor demand due to the high potential to hedge against climate risk.

    “Firms with better ESG performance have lower exposure to climate risk and earn lower returns, consistent with an increased investor demand due to the high potential to hedge against climate risk (Ardia et al., 2022;Bolton & Kacperczyk, 2021;Engle et al., 2020;Huynh & Xia, 2021).”

    From A review on ESG investing: Investors' expectations, beliefs and perceptions (2024) · cites this paper as Engle et al., 2020

  • Approaches used in climate analytics include NLP for identifying climate risks and investment opportunities in company disclosures, NLP for analyzing media climate coverage to dynamically hedge climate change risk, econometric approaches for arbitrage strategies using carbon risk factor, and ML for forecasting carbon price in emission exchanges.

    “Approaches used in this field include: natural language processing techniques for identifying climate risks and investment opportunities in disclosures made by companies [254,442,498,752] as well as for analyzing the evolution of climate coverage in the media to dynamically hedge climate change risk [221]; econometric approaches for developing arbitrage strategies that take advantage of the carbon”

    From Tackling climate change with machine learning (2023) · cites this paper as [221]

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Authors
Engle, R. F., Giglio, S., Kelly, B., Lee, H., & Stroebel, J.
Affiliations
  • National Bureau of Economic Research (US)
  • Center for Economic and Policy Research (US)
  • Yale University (US)
  • New York University (US)
Corresponding author
Engle, Robert F
ORCID
Venue
The Review of Financial Studies
Publisher
Oxford University Press (OUP)
Published
2020-02-14
Volume
33
Issue
3
Pages
1184-1216
ISSN
  • 0893-9454 (ISSN-L)
  • 1465-7368
DOI
10.1093/rfs/hhz072
OpenAlex
W4214836379
Cited by
1,489
References
25
Citations by year
2026: 330 · 2025: 360 · 2024: 311 · 2023: 207 · 2022: 140 · 2021: 79 · 2020: 37 · 2019: 19 · 2018: 4 · 2016: 1 · 2012: 1
FWCI
83.22
Type
journal article
Language
en
Open access
closed
Licence
academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model (vor)
Locations
  • Review of Financial Studies (publishedVersion)
  • RePEc: Research Papers in Economics (submittedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Sustainable Finance and Green Bonds
  • Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
  • Social Sciences › Business, Management and Accounting › Accounting › Risk Management in Financial Firms
Keywords
climate risk, dynamic hedging, climate news, mimicking portfolios, ESG ratings, climate risk exposure, hedging portfolio, out-of-sample performance

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