Climate Risk and Capital Flows in Eastern European Emerging Markets: How Physical and Transition Risks Reshape Foreign Direct Investment Portfolios (Published)
This paper looks at how climate-related risks affect Foreign Direct Investment (FDI) in Eastern European Emerging Markets (EEEMs). It separates physical risks, like extreme weather, from transition risks linked to policy changes such as the EU Emissions Trading System (EU ETS) and the Carbon Border Adjustment Mechanism (CBAM). Countries like Poland, Romania, the Czech Republic, and Hungary have long depended on a carbon-heavy economic model, making them especially vulnerable. The findings show that higher carbon prices are temporarily lower than traditional manufacturing FDI, while greater physical risks increase sovereign bond spreads and reduce greenfield investments in at-risk areas. However, these risks also lead to more investment in renewable energy and green technologies. The study suggests that EEEMs need to update their policies to reduce stranded asset risks and attract sustainable investment in a world focused on climate issues.
Keywords: Foreign Direct Investment, climate risk, eastern Europe, physical risk, transition risk