What does the term 'climate risk premium' imply for an investment?

The term 'climate risk premium' refers to the additional return that investors require to compensate for the risks associated with climate change. This premium is indicative of the potential negative impact that climate-related risks can have on an asset's value. As climate change leads to more severe weather events, regulatory changes, and shifts in market demands, investors recognize that these factors can jeopardize future cash flows and asset values.

Therefore, the climate risk premium reflects the heightened awareness among investors about the potential economic repercussions of climate risks. Assets that are more exposed to climate threats will typically require a higher risk premium to attract investment, as investors seek compensation for the perceived additional risk. This understanding is crucial in making informed investment decisions, as it highlights the importance of evaluating climate-related factors when assessing the potential risks and returns of an investment.