Climate risk in finance: Asset pricing, institutions and stability

Climate risks, and increasingly nature-related risks, now shape asset pricing, intermediation, and financial stability. Related debates extend to nature exposures and adaptation. Recent research uses emissions data, physical-hazard indicators, and text- and news-based measures to test whether climate exposure is priced in equities, bonds, derivatives, and insurance-linked instruments. In parallel, banks, insurers, and institutional investors adjust lending, underwriting, and portfolio decisions after physical and transition shocks, while supervisors apply scenario analysis and climate stress tests. This survey centres measurement and identification choices and traces how pricing results connect to balance-sheet channels and prudential tools. It is organised around four themes: (i) how climate risk enters standard asset-pricing and intermediation frameworks; (ii) construction of physical, transition, and text-based indicators, with attention to data gaps and model dependence; (iii) pricing evidence across asset classes, including equities, corporate and sovereign bonds, green bonds, and derivatives and insurance-linked markets; and (iv) climate risk in banking, insurance, asset management, systemic risk, and stress testing. The survey discusses identification and horizon challenges, the concentration of evidence in a small set of countries and hazards, and a research agenda linking environmental science and financial data, extending to nature-related exposures, and evaluating adaptation finance and protection gaps.