Quantitative Assessment of Climate Risk Integration into Asset Pricing Models and Its Impact on Global Investment Portfolios

The increasing frequency and severity of climate-related events have underscored the importance of integrating climate risk into asset pricing models, fundamentally reshaping global investment strategies.This paper presents a quantitative assessment of climate risk incorporation into traditional and modern asset pricing frameworks, such as the Capital Asset Pricing Model (CAPM) and multifactor models.By analyzing physical risks (e.g., extreme weather events) and transition risks (e.g., policy shifts towards decarbonization), we evaluate how climate-related factors influence asset valuations, expected returns, and risk premiums.The study leverages empirical data from diverse markets to quantify the sensitivity of asset prices to climate risks, highlighting sectoral vulnerabilities, particularly in energy, real estate, and agriculture.Furthermore, the paper examines the implications of climate risk integration on global investment portfolios, focusing on diversification, portfolio optimization, and long-term performance.We assess how institutional investors, such as pension funds and sovereign wealth funds, adjust asset allocations in response to climate risk metrics, including carbon footprint analysis and environmental, social, and governance (ESG) scores.The findings indicate that portfolios incorporating climate risk factors exhibit different risk-return profiles, often favoring sustainable investments with lower exposure to carbon-intensive assets.Additionally, the research explores the role of regulatory frameworks and disclosure requirements, such as the Task Force on Climate-related Financial Disclosures (TCFD), in promoting transparency and standardization in climate risk reporting.By integrating climate risk into asset pricing models, this paper provides a robust analytical foundation for investors and policymakers to navigate the evolving landscape of climate finance and sustainable investing.