Companies that take proactive measures to manage climate risks see an increase in their valuations, while those that take a passive approach are devalued in the stock market, according to a recent study. The University of Florida conducted a groundbreaking research that measured how much exposure corporations have to climate change risks such as hurricanes, wildfires, and climate-related regulations, as well as how these risks impact their market valuations. The study also reveals a significant discrepancy – companies that actively address climate risks perform much better than those that neglect the potential threats.Using data from earnings call transcripts of nearly 5,000 U.S. public companies, experts created new ways to gauge businesses’ exposure to climate risks caused by extreme weather conditions. They also looked at the “transition risks” companies encounter as the world moves towards a low-carbon economy, such as the transition to renewable energy and reduced carbon emissions. The study revealed that companies facing high transition risks, like those related to emissions regulations, were often undervalued by investors. Qing Li, a Clinical Assistant Professor at the University of Florida Warrington Co, noted that there has been a growing focus on climate change among investors in recent years.College of Business. “Our findings indicate that companies with significant exposure to transition risk tend to experience negative impacts on their market performance.”
On the other hand, companies that are actively making efforts to adjust their business models and minimize their climate impacts through strategies such as increasing their sustainable investments and implementing green technologies do not face the same valuation discount. These proactive companies tend to increase their sustainable innovations and maintain their research spending even as transition risks become more severe.
In contrast, companies that acknowledge transition risks but do not take proactive measures tend to reduce their research and development budgets and cut jobs when they face higher climate exposure—a potential disadvantage in the market.
Many companies are facing challenges related to climate change, which can hinder their long-term competitiveness.
Yuehua Tang, Emerson-Merrill Lynch Associate Professor, pointed out the stark differences in strategies and outcomes between proactive and nonproactive firms. Tang stated that companies that are transparent about their climate vulnerabilities and demonstrate tangible responses to mitigate those risks tend to be rewarded by markets.
These findings come at a time when there is increasing pressure from investors, regulators, and activists for companies to publicly disclose climate risks. In 2024, the SEC implemented new rules requiring public corporations to report risks from climate change impacts.
and in some situations their releases of greenhouse gases.
Although there are expenses for companies that adjust to both the physical and transitional climate risks, a study conducted by Li, Tang, Hongyu Shan (Ph.D. ’19) from the China Europe International Business School, and Vincent Yao from Georgia State University, suggests that proactive actions could actually enhance appraisals and readiness as investors increasingly take climate threats into account when making investment decisions.
“Corporate Climate Risk: Measurements and Responses” can be found in The Review of Financial Studies. The research team also provides their measures of climate risk at: <a href=”ht rnrnThe article can be found at the following link: https://www.corporateclimaterisk.com/
The journal reference for this article is:
Qing Li, Hongyu Shan, Yuehua Tang, Vincent Yao. Corporate Climate Risk: Measurements and Responses. The Review of Financial Studies, 2024; DOI: 10.1093/rfs/hhad094