Transition Risk, a New Factor in the Zoo?
Clément Toussaint 
Abstract
Transition risk, captured by a tradable mimicking portfolio based on a Transition Risk Indicator (TRI), constitutes a non-redundant priced factor that expands the investment opportunity set. The TRI-based factor commands a significant negative risk premium, consistent with its role as a hedge against transition shocks, and is not spanned by eight standard benchmark models. In a horse race against two leading textual climate-risk proxies based on media concern and climate policy, only TRI survives formal spanning tests and Bayesian model comparison, extended here to include climate risk as a factor category. Existing proxies are either redundant or fail to command a significant premium. These results help discipline the emerging climate factor zoo by showing that not all textual climate proxies survive as distinct traded factors.