This paper investigates the dynamic effects of global climate variability on the stock returns of 28 countries using country-specific structural vector autoregression models from 2003 to 2025. Empirical results suggest that the impact of physical climate risk shocks, proxied by the Niño 3.4 sea surface temperature anomalies, is highly heterogeneous. Stock markets in several European and emerging economies, such as Chile, Czechia, Denmark, Hungary, Iceland, Mexico, New Zealand, Sweden, and Switzerland, respond positively, while markets in the United States and Korea react negatively to El Niño events. These climate risk shocks explain a significant portion of stock return volatility, reaching up to 9.0% in Hungary. A central contribution is the finding that financial markets primarily react to unexpected climate anomalies rather than forecasted ones. This indicates that while markets efficiently price predictable information, climate surprises are a genuine and unpriced risk factor. To explore potential nonlinearities, we also conduct a subsample analysis and find that responses were largely positive in the 2003–2013 period but predominantly negative in the 2014–2025 period. This shift coincides with a major change in the global climate policy landscape. The results establish this specific driver of physical climate risk as a significant, country-specific, and dynamic factor requiring sophisticated analysis by investors and policymakers.
