Climate risk and biodiversity exposure

• Climate policies initially increase financial stress due to uncertainty and adjustment costs. • Over time, as markets adapt, these policies reduce financial stress, enhancing stability. • Persistent volatility spillovers indicate strong interconnectedness among financial systems. • Climate-related shocks are systemic, affecting multiple markets simultaneously. This study investigates the impact of climate and biodiversity-related risks on financial stress in the EU, USA, and UK using the DCC-MGARCH model. The results indicate that stringent environmental policies initially increase financial stress in the short term, however, these effects diminish over time, leading to reductions in stress by promoting sustainable growth. Persistent volatility spillovers across regions highlight the interconnectedness of global financial systems and the systemic nature of climate-related shock. Although there is short-term volatility, markets generally stabilize as policy impacts become evident.