Climate change represents great physical and transition risks to the economy in the form of disasters and unaccustomed changes. Although these risks are recognized in the literature, there is still no unequivocal consensus on how to react or who should react to climate change and shield the economy against these risks. However, looking at the financial side of the economy, changes in investors' behaviors can give us ideas on how climate change can disrupt the financial market. In my work, I examine financial markets' reactions to climate change. Specifically, I focus on capital flows' different behaviors to disastrous climate events. Capital flows are key contributors to the global economy through financial markets: they can improve the financial sector's competitiveness in a country, promote investment, and help to smooth consumption. However, their large size and volatility represent potential risks to the global and local financial systems. The literature has assessed potential drivers of capital flows, but we lack information about the effect of climate change. I examine how climate events can be new drivers of capital flows, especially for sudden changes. Disastrous climate events may drive capital flows via two channels. First, climate events can be country-specific pull factors as investors might pull back from a country after a weather shock. Second, they might represent a global push factor: after an extreme climate event strikes outside the country, investors might still withdraw even without suffering actual loss, if the country is prone to disasters. To understand financial markets' true reactions to climate change, I aim to identify its impact by examining local and regional climate effects. To quantify the local aspect, I proxy the severity of climate events through two methods. First, I evaluate the duration of disastrous events with respect to countries' climate history. Therefore, a longer flood event will count more than a shorter one. Second, I control for the population's exposure to climate events. Hence, I capture the extent to which the population has been affected by a disaster, rather than focusing on possibly large but separate disasters in a country. This method can highlight that a storm might have a more significant effect in the densely populated Chicago than in the Sahara. To capture whether climate change represents a regional push factor, I count regional disasters around a country quarterly. Both local and regional methods use climate event indices that capture climate change by focusing on common disasters. Specifically, the indices count droughts, extreme temperatures, floods, and storms. These new indices measure climate change more accurately, as they incorporate more than one disaster contrary to the common procedure in the literature, focusing solely on storms, for example. I find that both regional and local indices cause sudden increases in capital inflows. My research has sound policy implications: countries experiencing sudden changes in capital flows are more susceptible to macroeconomic instability and may suffer more easily from other financial risks. Therefore, understanding whether climate change is a new driver of capital flows, domestic institutions can prepare their countries better for sudden changes. [ABSTRACT FROM AUTHOR]