Gianfrate explains how climate-related news affects the cost of capital for private infrastructure investment

Gianfranco Gianfrate (EDHEC Business School and Baffi Centre) and Yuhan Zhang (EDHEC Business School) have examined how climate-related news affects the cost of capital for private infrastructure investment across countries. The paper studies whether and how climate-related information, as conveyed through media coverage, influences the valuation of private infrastructure assets. The authors combined a novel dataset of global infrastructure transactions with country-level measures of climate sentiment constructed from GDELT news data, alongside indicators of climate policy stringency and physical risk in the paper “Climate Risks and Private Infrastructure Valuation”. 

The methodology

The infrastructure data, drawn from Scientific Infra & Private Assets (SIPA), provide asset-level information on valuation multiples and realized returns across countries and sectors. They construct a climate sentiment index using global news data from the GDELT Global Knowledge Graph, capturing the tone, intensity, and thematic breadth of climate-related media coverage. This measure allows us to isolate the informational component of climate risk from realized environmental conditions and policy changes. The empirical strategy exploits within-country variation over time, controlling for country, sector, and year fixed effects, as well as macro-financial conditions and firm characteristics. They examine the effects of climate information on both valuation multiples and realized returns, allowing us to distinguish between a discount-rate channel, in which information affects required returns, and a cash-flow channel, in which it affects expected fundamentals.

The findings

First, climate-related information is systematically incorporated into infrastructure valuations. More adverse climate news is associated with lower valuation multiples, consistent with higher required returns, while more favorable information has the opposite effect. Quantitatively, a one-standard-deviation improvement in climate sentiment increases valuation multiples by approximately 0.5 percent, corresponding to a reduction in the cost of capital of several basis points. 

Second, these effects are economically meaningful and persistent. 

Third, the response is heterogeneous across countries and is stronger in environments characterized by higher transition risk and weaker institutional frameworks.

The authors of the paper find that climate information affects asset prices primarily through a cost-of-capital channel. While valuation multiples respond strongly to climate sentiment, they find little evidence of corresponding effects on realized returns. This pattern indicates that investors incorporate climate information ex ante by adjusting discount rates, rather than through subsequent changes in realized cash flows. The results are consistent with models in which climate-related risks are priced through changes in expected returns and discount rates.

The findings have direct policy implications. If climate-related information affects the cost of capital, then improving the transparency, credibility, and consistency of climate-related disclosure and policy communication may reduce uncertainty and facilitate investment in low-carbon infrastructure. More broadly, the results suggest that the informational environment is a key determinant of how efficiently capital is allocated during the energy transition.