By Sarah DeWeerdt, Anthropocene, April 23, 2024
A first-of-its-kind study showed that companies that proactively respond to climate risk are rewarded by the market; those that don’t, are punished.
Adapting to climate change and preparing for the green transition entails significant costs for businesses—but is likely to be a good investment, according to a new study. The analysis, one of the first to quantify how climate risk is priced in financial markets, suggests that companies that fail to respond in a proactive way to climate threats lose market value.
In the past there has been relatively little research on climate finance topics. Researchers have lacked good methods to measure climate risk exposure, at least for equity assets (as opposed to real estate where projections of flood risk, sea level rise, and so on serve as clear-cut indicators of climate risk).
The new paper fills the gap with the help of earnings calls, which corporations typically conduct once a quarter to update investors, journalists, and others about their financial situation. Because corporations only have time to convey the most salient information in these brief calls, anything they say about how they perceive their climate risk and what they are doing in response is likely to be highly relevant. The calls also happen on a regular basis, yielding a close to real-time measurement of how climate risk changes and evolves.
Source: Li Q. et al. “Corporate Climate Risk: Measurements and Responses.” The Review of Financial Studies 2024.