The Materiality and Measurement of Physical Climate Risk: Evidence from Form 8-K

Gostlow, Glen

doi:10.2139/ssrn.3736100

Cited by 7 publications

(5 citation statements)

References 56 publications

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“…Furthermore, our overall measure positively relates to cash holdings (Heo (2021)) and explains how strongly U.S. firms' emissions declined in response to the EPA's 2010 Greenhouse Gas Reporting Program (Tomar ( 2023)). Our physical measure is related to physical risk disclosure in 8K filings (Gostlow (2021)), and the opportunity measure relates to firms' carbon risk management (Duong et al (2021)). On the financial side, our physical measure is associated with lower leverage after the Paris Agreement (Ginglinger and Moreau (2022)).…”

mentioning

confidence: 99%

Firm‐Level Climate Change Exposure

Sautner¹,

Lent²,

Vilkov³

et al. 2023

The Journal of Finance

423

134

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We develop a method that identifies the attention paid by earnings call participants to firms' climate change exposures. The method adapts a machine learning keyword discovery algorithm and captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The measures are available for more than 10,000 firms from 34 countries between 2002 and 2020. We show that the measures are useful in predicting important real outcomes related to the net-zero transition, in particular, job creation in disruptive green technologies and green patenting, and that they contain information that is priced in options and equity markets. CLIMATE CHANGE WILL PROFOUNDLY AFFECT the way business is conducted. Scientists have developed complex models that estimate the effect of greenhouse gas emissions on the global climate. At the same time, however, little

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mentioning

confidence: 99%

Firm‐Level Climate Change Exposure

Sautner¹,

Lent²,

Vilkov³

et al. 2023

The Journal of Finance

423

134

View full text Add to dashboard Cite

show abstract

“…The thesis finds that over the sample period from 1970 to 2017 the book value of equity The findings are consistent with the literature on climate finance, which justifies climate risk as a material and systematic risk that is priced in the stock market (Balvers et al, 2017;Bolton & Kacperczyk, 2021;Görgen et al, 2020). Climate finance research attributes the pricing of climate risk to factors such as economic channels including agriculture, labor productivity, investors mood, and consumer demand (Goetzmann et al, 2015;Graff Zivin & Neidell, 2014;Hong et al, 2019;Pankratz et al, 2019).…”

Section: Market Reaction To Climate Risksupporting

confidence: 77%

“…It is very hard to price, hedge, or insure against, and the exposure to climate risk varies significantly across firms, industries, regions and time periods (Giglio et al, 2021). Görgen et al (2020) argue that carbon risk should not be measured directly using carbon emission, and should take into account firms' strategic and operational exposures. Some authors note that the ESG databases suffer from selfreporting bias, green-washing bias, limited coverage, being opaque, being self-serving, and idiosyncrasies (Görgen et al, 2020;Li et al, 2020;Nagar & Schoenfeld, 2022).…”

Section: The Climate Risk Premiummentioning

confidence: 99%

“…The authors discuss several potential explanations addressing the emission-return relation, including behavioral, corporate governance, and regulation explanations. Görgen et al (2020) investigate the relationship between carbon risk and share returns by using a factor-based asset pricing model. The reasons for adopting a factor approach are that the factor-mimicking portfolios capture the systematic variation in returns which is related to underlying economic risk.…”

Section: The Reaction In Share Marketsmentioning

confidence: 99%

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Equity Valuation and Climate Change

Li¹

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The thesis investigates whether climate risk influences equity value through the channel of the accounting system and, therefore, if investors adjust their relative valuation weights on different accounting variables with the exposure to climate risk. The thesis is motived by increasing global temperatures, which are thought to cause an increase in natural disasters, have a negative impact on economic growth, and produce instability in the financial system. The negative consequences of climate change make the issue an important one for legislators, regulators, standard setters, financial intermediaries, investors, and the general public. The literature suggests that climate risk has become material in its effect on capital markets through its impact on the economy via such channels as agriculture, labor productivity, investors moods, etc. However, few studies relating the long-run effect of climate risk on capital markets through the channel of the accounting system have been undertaken to date. This thesis therefore aims to contribute to an improved understanding of the way climate risk impacts on equity valuation though its effect on the reporting on the accounting aggregates of book value, earnings, and dividends. The thesis adopts the accounting-based valuation theoretical framework of Gordon (1962) and Ohlson (1995). The elasticity of equity market value with respect to accounting variables is the main measure used to assess the impact of accounting on market values. The elasticities on the individual accounting variables reflect the relative importance capital market participants place on the corresponding accounting variable. In the value relevance literature, the book value of equity captures accumulative past information and is viewed as a backward looking, conservative, or pessimistic measure. Earnings is considered to reflect information about the future and is viewed as a forward looking, aggressive, or optimistic measure. If the elasticities of earnings are falling over time relative to the elasticities of book value of equity, it may indicate the market is paying greater attention to the latter compared to the former and being more pessimistic about equity values, due to the impact of increasing climate risk. The central hypothesis in the thesis is therefore that there is a positive association between the long-run elasticities of book value of equity and climate risk and a negative association between the long-run elasticities of earnings and climate risk. The method used to test this hypothesis adopts a two-stage research design. The first stage estimates elasticities from annual cross-section regressions of U.S. data for the economy as whole and individual industries. In the second stage, a time series analysis regresses the elasticities obtained in the first stage on climate risk variables. The market value and accounting data is from a sample of 180,042 annual observations on listed U.S. firms over the period 1971 to 2017. The key climate risk measure is the annual global anomaly temperature over the same period. The first stage results show that the models explain about 80% of the variation in stock price. The explanatory power holds for both the full sample of U.S. firms and for the subsample based on individual industries. The results demonstrate that book value of equity has a relative higher valuation importance than earnings during the period from 1971 to 2017 at both the U.S. and individual industry levels. Over the entire sample period, for the U.S. economy as a whole, market value increases by about 0.519% when the absolute value of book value of equity increases by 1%, and by 0.271% when the absolute value of earnings increases by 1%. In the second stage, the results demonstrate that the signs of climate variables on the book value of equity and earnings are different. The results for the U.S. economy as a whole show that a 1oC increases in the global anomaly temperature is associated with an increase in the elasticity for book value of equity of 0.117 whereas a 1oC increase in the global anomaly temperature is associated with a decrease in the elasticity for earnings of 0.1698. Although the signs of these impacts are the same across different industries, the magnitudes vary across the industries. The results thus provide evidence which is consistent with the hypotheses of the thesis. This thesis not only contributes to the studies in climate finance, environmental accounting, and accounting valuation, but also has important policy implications for accounting standard setters.

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“…Exposure has expected relationships with covariates such as emissions, renewables investments, and public attention to climate change (see Appendix A). We also build on a growing literature linking these exposure measures with outcomes such as green patenting (von Shickfus, 2021), physical risk disclosure (Gostlow, 2020), carbon risk management (Duong et al, 2023), and lending (Ginglinger and Moreau, 2019).…”

Section: Climate Exposurementioning

confidence: 99%

Climate Exposure Drives Firm Political Behavior: Evidence from Earnings Calls and Lobbying Data

Baehr,

Bare,

Heddesheimer

2023

Preprint

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The private sector drives much of climate politics, yet companies selectively choose specific issues and tactics for influence. When do firms engage in climate-related politics? In the face of multifaceted potential impacts from climate change, some firms expect increased costs from new regulation and should lobby against such proclimate policies. Another matter is relative risk. Firms with physical asset vulnerability and those with greater green business opportunity relative to their competitors should lobby in favor of pro-climate regulation. We proxy for exposure to these threats and opportunities by analyzing the amount of discussion paid to physical, regulatory, and technological opportunity aspects of climate change on quarterly earnings call transcripts for more than 2000 public firms between 2002 and 2020. We estimate the effect of variation in climate exposure on the type and level of political behavior used to influence climate policy through lobbying. We find that increased overall exposure to climate change increases the likelihood that firms engage in any climate-related lobbying, and that differences in exposure to physical risks, regulatory costs, and market opportunities explain across- and within-industry variation of political activity.

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The Materiality and Measurement of Physical Climate Risk: Evidence from Form 8-K

Cited by 7 publications

References 56 publications

Firm‐Level Climate Change Exposure

Firm‐Level Climate Change Exposure

Equity Valuation and Climate Change

Climate Exposure Drives Firm Political Behavior: Evidence from Earnings Calls and Lobbying Data

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