Work

Climate vulnerability and market volatility: Evidence from European firms

Year: 2026

Type: article

Abstract: • Climate vulnerability is associated with higher firm-level volatility. • The effect holds within countries and industries over time. • The volatility response is stronger for financially constrained firms. • Financial constraints amplify exposure to climate vulnerability. • Climate risk manifests primarily as market uncertainty. This study examines the association between country-level climate vulnerability and firm-level stock return volatility in Europe. Using panel data on 490 listed firms across 17 European countries from 2013 to 2022, we find that firms located in more climate-vulnerable countries exhibit significantly higher market volatility. The results are robust across alternative measures, fixed-effects specifications, and endogeneity checks. We further show that this relationship is amplified for financially constrained firms when constraints are measured using the Kaplan–Zingales index. Overall, the findings suggest that climate vulnerability primarily manifests as heightened market uncertainty and that financial frictions play a key role in transmitting macro-level climate risk to firm-level market volatility.

Source: Finance research letters

DOI: 10.1016/j.frl.2026.109598

Authors: Sarela Enriquez-Perales, Conrado Diego García-Gómez, José María Díez-Esteban

Institutions: Esan University, Universidad de Valladolid, Universidade do Porto, Universidad de Burgos

Language: English

Topic: Sustainable Finance and Green Bonds

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: hybrid

Estimated APC paid: $3,730