Yale School of Management

International Center for Finance

Providing academic and professional support for research in financial economics.

The Importance of Climate Finance Research In Addressing Climate Change

Earth DayHappy Earth Day! This year the Yale ICF is celebrating Earth Day by sharing a list of climate finance research conducted by the Yale SOM finance faculty. Read more about the importance of climate finance research and its significance in addressing climate change below!

Climate Finance” by Stefano Giglio, Bryan Kelly, Johannes Stroebel


We review the literature studying interactions between climate change and financial markets. We first discuss various approaches to incorporating climate risk in macro-finance models. We then review the empirical literature that explores the pricing of climate risks across a large number of asset classes including real estate, equities, and fixed income securities. In this context, we also discuss how investors can use these assets to construct portfolios that hedge against climate risk. We conclude by proposing several promising directions for future research in climate finance. Read more.

Climate Change and Long-Run Discount Rates: Evidence from Real Estate” by Stefano Giglio, Matteo Maggiori, Krishna Rao, Johannes Stroebel, and Andreas Weber

(Accepted Manuscript 25 March 2021 - Review of Financial Studies special Issue)


We explore what private market data can tell us about the appropriate discount rates for valuing investments in climate change abatement. We estimate the term structure of discount rates for real estate up to the very long horizons relevant for investments in climate change abatement. The housing term structure is downward-sloping, reaching 2.6% at horizons beyond 100 years. We also show that real estate is exposed to both consumption risk and climate risk. We explore the implications of these new data using a tractable asset pricing model that incorporates important features of climate change. Climate change is modeled as a rare catastrophic event, the probability of which increases with economic growth. Economic activity partially mean reverts following a climate disaster, capturing the ability of the economy to adapt... Read more.

Is the Risk of Sea Level Rise Capitalized in Residential Real Estate?” by Justin Murfin and Matthew Spiegel

(Published in the Review of Financial Studies special issue: Climate Finance, Volume 33, Issue 3, March 2020)


Using a comprehensive database of coastal home sales merged with data on elevation relative to local tides, we compare prices for houses based on their inundation threshold under projections of sea level rise. The analysis separates the sensitivity of housing to rising seas from other confounding characteristics by exploiting cross-sectional differences in relative sea level rise due to vertical land motion. This provides variation in the expected time to inundation for properties of similar elevation and distance from the coast. In a variety of specifications and test settings, we find precisely estimated null results suggesting limited price effects. Read more.

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Hedging Climate Change News,” by Robert F Engle, Stefano Giglio, Bryan Kelly, Heebum Lee, and Johannes Stroebel

(Published in the Review of Financial Studies special Issue: Climate Finance, Volume 33, Issue 3, March 2020)


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. Read more.

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Sea Level Rise and Municipal Bond Yields” by Paul S. Goldsmith-Pinkham, Matthew Gustafson, Ryan Lewis, Michael Schwert


This paper examines the effects of climate change on municipal financing costs. Using a sample of bonds issued by school districts in coastal counties, we show that municipal bond markets began pricing sea level rise (SLR) exposure following upward revisions in SLR projections in 2013. The effect is concentrated on the East Coast, where SLR is expected to be twice as large as on the West Coast, is increasing in states' belief in climate change, and is driven largely by a district's exposure to worst-case SLR scenarios. While the pricing effects of SLR are statistically significant, they are economically small and indicate that financial markets do not currently anticipate a high probability of SLR-induced default in the near future. Read more.

About the author

Electra Ferriello

Assistant Director ICF