New releases of Working Papers and Newsletter on the economic research of the Bank of Italy – 28 July 2023; No. 1420 – Flight to climatic safety: local natural disasters and global portfolio flows

The Bank of Italy has released six new Working Papers and the Newsletter on its economic research. Due to relevance we only report about the paper „Flight to climatic safety: local natural disasters and global portfolio flows”.
This paper investigates how natural disasters impact the investment decisions of international investors. It emphasizes that weather-related natural disasters are increasing in frequency and intensity globally due to climate change. However, there is limited empirical evidence on the effects of local climate events on investments beyond country borders.
The study analyzes weekly financial flows to equity funds in 39 countries, along with data on natural disasters that occurred in these countries since 2009. The main focus is on understanding the effects of climate-related extreme events on financial investment in the affected countries, neighboring nations, and those considered less vulnerable to climate risks.
The research finds that the occurrence of natural disasters negatively affects net investment flows into an affected country, but only if that country is an emerging economy with high climate risk. In such cases, inflows also decrease for other emerging countries with high climate risk in the same geographic area, suggesting that investors become more concerned about climate risks.
At the same time, there is an *increase in investment flows to advanced countries, particularly those with lower exposure to climate risks. This indicates that investors perceive advanced countries as safer and more attractive investment destinations during periods of heightened climate-related risks.
The findings suggest that international investors reallocate their portfolios away from climatically risky countries towards safer and more resilient economies. The occurrence of such natural disasters raises investors‘ awareness of global climatic threats and influences their beliefs about the risks associated with different invested countries.
The paper contributes to the literature by exploring how natural disasters shape the dynamics of global capital flows, offering insights into the international dimension of portfolio investments. It also sheds light on the role of climate vulnerability in determining financial flows and provides new perspectives on defining safe haven countries.