ESG Investing, Green Bonds, and the Pricing of Climate Risk

Abstract

Environmental, Social, and Governance (ESG) investing and green finance have grown from niche ethical investment strategies to mainstream financial practice, with global ESG assets under management estimated at over $30 trillion in 2023 and the green bond market exceeding $1 trillion in cumulative issuance. Climate risk—including physical risks from climate change impacts and transition risks from policy and technological changes required to decarbonize the economy—is increasingly recognized by central banks, financial regulators, and institutional investors as a material financial risk requiring integration into investment and risk management frameworks. This paper reviews the financial performance evidence for ESG investing (whether ESG portfolios outperform, underperform, or match non-ESG benchmarks), the green bond market and greenium evidence, and the emerging frameworks for integrating physical and transition climate risks into portfolio management and corporate financial analysis.