Climate Risk Through the Looking Glass - An Exploratory Analysis of Whether Climate Risks Are Priced into the Swedish Stock Market Using News-Based Factors and Asset Pricing Models

Sammanfattning

As climate change increasingly challenges global economies, this thesis explores whether climate risks are reflected in financial markets, with a specific focus on the Swedish equity market. This research analyses a comprehensive dataset of Swedish news articles and financial data from January 1, 2000, to December 31, 2023, employing advanced unsupervised machine learning techniques that integrate Latent Dirichlet Allocation with traditional asset pricing models. This approach constructs factors to capture market perceptions of climate risks, specifically Swedish Climate Policies, Energy Transition Policies, International Climate Agreements, and Global Warming, across different periods. The findings reveal a distinct "brown premium", where stocks with greater negative sensitivities to energy transition policies yield higher returns. Notably, this effect intensified following the Paris Agreement, highlighting active market pricing of policy-induced risks as awareness and regulatory commitments deepened globally. Conversely, physical climate risks like global warming do not show similar pricing effects, suggesting a market differentiation between immediate policy-driven risks and more generalized long-term environmental challenges.