High stakes in a low-carbon world: Financial risks and returns in renewable energy

This paper explores the impact of climate and transition risks on the financial
performance of firms in the renewable energy and sustainable technology sectors over the period from January 2011 to December 2023. Using a dynamic state-space model estimated via the Kalman Filter, we assess the influence of latent climate-related risks on firm-level excess returns. The analysis focuses on six major companies operating in industries such as solar and wind energy, advanced energy storage, and electric vehicles. Specifically, the study examines how oil price fluctuations and climate policy risk affect evolving market dynamics and the excess returns of these firms. Our findings indicate that climate and transition risks are significant drivers of excess returns, with more exposed firms showing heightened financial sensitivity. Furthermore, oil price fluctuations and increasing climate policy pressures tend to strengthen the financial position of renewable energy firms. These results offer key insights for investors, policymakers, and corporate strategists navigating the low-carbon transition and managing climate-related financial risks.