The effect of climate risks on the interactions between financial markets and energy companies

In recent years, the investment community has become increasingly aware of the investment risks from both the physical effects of climate change and the regulatory responses to facilitate the transition to a net-zero economy. The potential impact of climate transition risks is especially large for fossil energy companies, given their central role in producing carbon emissions. Here we discuss how concerns about climate risks influence the way investors allocate their capital and exercise their oversight of firms, and how this investor response affects companies in the energy sector. We then explore how different energy firms have responded to climate-related pressures from their investors and other stakeholders. We conclude by highlighting promising areas of research for understanding how climate risks affect the interaction between financial markets and the energy sector.