Portfolio Decisions, Climate-Related Assets, and Commodity Prices: The Importance of Time Scales for Climate Finance

This chapter investigates the implication of short-term decision horizons as well as climate transition and physical risks on financial markets, with special attention to fossil fuels and agriculture activities. The study employs harmonic estimations obtained through the Fast Fourier Transform (FFT) to decompose time series into high- and low-frequency components and filter short-term market oscillations. The analysis includes commodity prices, green and carbon-intensive financial market indices, and agricultural prices, the latter being a novelty of our work and particularly relevant to developing countries. The results show that fossil fuel prices and security returns are more volatile than other series, including agricultural prices, which highlights the importance of having a specific approach to agriculture. However, there are spillover effects between fossil fuels and agricultural prices. In contrast, green asset returns have a weak relationship with commodity prices, indicating a lower exposure of green assets to climate risks in both agriculture and fossil fuel activities. Overall, this study provides important lessons for development strategies to leverage resources for climate transition in financial markets.