Assessing the Impacts of Transition and Physical Climate Risks on Industrial Metal Markets: Evidence from the Novel Multivariate Quantile-on-Quantile Regression

Climate change and global warming have been shown to increase the frequency and intensity of extreme weather events. Concurrently, substantial efforts are being directed toward fostering the transition to a low-carbon economy. These concurrent trends result in the emergence of both physical and transition climate risks. This study investigates the impacts of climate risks, both physical and transition, on the return of major industrial metals (aluminum, copper, iron, lead, tin, nickel, and zinc) between January 2005 and December 2023. Employing the novel multivariate quantile-on-quantile regression (m-QQR) approach, this study examines how climate risks affect metal markets under different market conditions and risk levels. The results reveal that transition risks exert a more significant adverse impact on metal returns during bearish markets conditions, particularly for metals linked to high-emission industries, while physical risks affect metal returns across a wider range of quantiles, often increasing volatility during extreme market conditions. Furthermore, copper and nickel, both of which are crucial for renewable energy development, demonstrate resilience at higher quantiles, highlighting their role in the transition to a low-carbon economy. Finally, these two metals may serve as effective hedges against losses in other metals that are more vulnerable to transition risks, like aluminum and lead.