Price of climate risk hedging under uncertainty

•High climate uncertainty reduces stock investment.•The higher the temperature, the lower the price an investor is willing to pay for the claim.•A stock index is correlated with the global temperature, reducing the impact of climate change on investor’s welfare.•Having a financial instrument that is highly correlated with climate change can provide substantial welfare benefits. In this manuscript, we examine the welfare benefits of climate risk hedges and the effects of climate uncertainty on optimal portfolios with different investment horizons. We consider the case when an investor who trades in a stock market also holds a claim that pays off when an adverse climate scenario materializes. The optimal investment strategy, the price of the claim, and the cost of climate change uncertainty are derived. It is shown that climate uncertainty reduces stock investment. Furthermore, an increase in climate uncertainty decreases investor’s welfare, even when climate risk hedging instruments are available.