An Empirical Investigation of the Climate Risk and Vulnerability Impact on the Economic Sentiment Across European Union Countries

The main objective of the study is to reveal whether the decision-making process of consumers and businesses is affected by the occurrence of climate risk. To benefit from both a spatial and a temporal perspective, a panel regression framework is used to account for 26 EU member countries over a two-decade time span (between 2000 and 2021). The key variables used as proxies for the climate change risk are represented by the level of CO2 emissions and four climate indices (the Climate Change Performance Index, the Climate Risk Index, the Climate Risk Vulnerability Index, and the Climate Risk Readiness Index). The empirical model is enhanced with a series of control variables that exhibit the main macroeconomic features of each country in the sample, while the dependent variable is represented by the Economic Sentiment Index. The findings highlight that the perception of households and companies related to their current and future economic/financial performance and their own expectations are affected by developments in various metrics of climate change. There is awareness on the climate challenges and impact not only from a macroeconomic standpoint but also at the microeconomic level of individuals and businesses.