Hills Sustainability
THEME: SUSTAINABILITY
23 August 2022 Financial Analysts Journal

Climate Change Vulnerability and Currency Returns

  1. Alexander Cheema-Fox, CFA
  2. George Serafeim
  3. Hui (Stacie) Wang, CFA
This study finds that non-G10 currencies are more vulnerable to physical risk from climate change. Portfolios exposed to currencies with decreasing vulnerability exhibit positive abnormal returns, but the relation holds only in non-G10 currencies.
Read the Complete Article in the Financial Analysts Journal CFA Institute Member Content

Overview

Using measures of physical risk from climate change, we develop a methodology to allocate currency pairs according to a country’s vulnerability and construct portfolios with decreasing vulnerability to physical risk. We show that non-G10 currencies are more vulnerable to physical risk, have become less vulnerable over time, and that the vulnerability measure is correlated with higher losses from natural disasters. Portfolios exposed to currencies with decreasing vulnerability have exhibited positive abnormal returns, with the abnormal return coming from currencies that have relatively high levels of vulnerability. These results exist in non-G10 currencies, while no relation is found within G10 currencies.

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