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Climate-Triggered Institutional Price Pressure: Does It Affect Firms’ Cost of Equity?

Published online by Cambridge University Press:  03 November 2025

George Skiadopoulos  and
Cheng Xue Open the ORCID record for Cheng Xue [Opens in a new window]
George Skiadopoulos
Affiliation:
University of Piraeus , Department of Banking and Financial Management Queen Mary University of London, School of Economics and Finance gskiado@unipi.gr, g.skiadopoulos@qmul.ac.uk
Cheng Xue*
Affiliation:
Nanjing Agricultural University , College of Finance
*
chengxue@njau.edu.cn (corresponding author)
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Abstract

We document that climate-triggered institutional portfolio rebalancing affects S&P 500 firms’ cost of equity through climate change price pressure (CCPP). Using a demand-based asset pricing framework, we estimate firm-level CCPP from physical and transition exposures over 2005–2021. A one-standard-deviation intensification of CCPP raises the cost of equity by up to 6% of its average, with banks and insurers as the main drivers. Yet firms do not subsequently improve environmental performance, indicating that the statistically significant effect of CCPP on cost of equity is ineffective to alter corporate behavior. Our CCPP metrics can help policymakers and investors design targeted environmental strategies.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 28
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to two anonymous referees and Ran Duchin (the editor) for their constructive, stimulating, and thorough comments. We thank Vimal Balasubramaniam, Ioannis Branikas, Lorenzo Bretscher (discussant), Nelson Camanho, Stefanos Delikouras, Ioannis Floros, Emmanuel Guerre, Emirhan Ilhan, Miao Liu (discussant), Tina Mavraki, Ioannis Moustakis, Don Noh, Filippos Papakonstantinou, Dimitris Papanikolaou, Panos Patatoukas, Ilaria Piatti, Chardin Wese Simen, George Skoulakis, Luke Taylor, Grigory Vilkov, Alexander Wagner, Bin Xu, Olivier David Zerbib, and participants at CRETE 2024, EFMA 2024, Frontiers of Factor Investing 2024 Conference, ICMA Doctoral Finance Symposium, IFABS 2024, International Conference on Empirical Economics 2024, SGF 2025, and Robeco Internal Research Seminar for useful discussions and comments. We also thank Alessio Lombini for his excellent research assistance. This work has been partly supported by the University of Piraeus Research Center. We have used AI tools for copy editing. All authors contributed equally to the work.

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