Pricing Climate Change Exposure

Abstract

We estimate the risk premium for firm-level climate change exposure among S&P 500 stocks and its time-series evolution between 2005 to 2020. Exposure reflects the attention paid by market participants in earnings calls to a firm’s climate-related risks and opportunities. When extracted from realized returns, the unconditional risk premium is insignificant but exhibits a period with a positive risk premium before the financial crisis and a steady increase thereafter. Forward-looking expected return proxies deliver an unconditionally positive risk premium with maximum values of 0.5%–1% p.a., depending on the proxy, between 2011 and 2014. The risk premium has been lower since 2015, especially when the expected return proxy explicitly accounts for the higher opportunities and lower crash risks that characterize high-exposure stocks. This finding arises as the priced part of the risk premium primarily originates from uncertainty about climate-related upside opportunities. In the time series, the risk premium is negatively associated with green innovation; Big Three holdings; and environmental, social, and governance fund flows and positively associated with climate change adaptation programs. This paper was accepted by Colin Mayer, special issue on business and climate change. Funding: Funding is provided by the Deutsche Forschungsgemeinschaft [Grant 403041268 – TRR 266] (L. van Lent and R. Zhang), the Institute for New Economic Thinking (L. van Lent), the 111 Project [Grant B18033] (R. Zhang), the Shanghai Pujiang Program (R. Zhang), and the Ministry of Education Project of Key Research Institute of Humanities and Social Science (R. Zhang). Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4686 .

Firm‐Level Climate Change Exposure

“…We provide additional evidence in Sautner et al. (2022) that our measures are priced in equity markets, and Kölbel et al. (2022) show that the overall measure is negatively associated with credit default swap (CDS) spreads after the Paris Agreement.…”

The Impacts of External Sustainability: Institutional Investors’ Sustainable Identity, Corporate Environmental Responsibility, and Green Innovation

“…Prior research analyzed its determinants from both internal and external perspectives: its internal factors include green absorptive capacity [6], green organizational identity [7], board gender diversity [8], climate change exploration [37], resource and knowledge sharing with outside partners [38], and environmental policy [39]; and its external factors include the greening of suppliers [9], market demand [10], customer and supplier collaboration [11], inter-firm R&D collaboration [12], ESG rating [13], the geographic proximity of financial resources [14], urban economy digitalization [15], pressure from stakeholders [16], and institutional investors [20]. However, no research examines it from the perspective of external sustainability (which refers to institutional investor's sustainable identity in this paper).…”

Climate Change Exposure and Firm Performance: Does Managerial Ability Matter?

“…CF Volatility in Equation ( 2) represents the volatility of cash flows over the next three (CF Volatility3) or five years (CF Volatility5). Climate Risk is the measure of climate change exposure developed by Sautner et al [34], which is widely used in the literature to quantify firm-level climate change risk (e.g., [24,37]). Sautner et al [34] consider that some firms face costs from physical climate change or are negatively affected by regulations implemented to combat global warming.…”