Companies ignoring climate risks get punished by markets, new study reveals
Companies that proactively manage climate risks boost their valuations, while those with a passive stance are discounted in the equity market (Adobe Stock)
A pioneering study from the University of Florida has quantified corporations’ exposure to climate change risks like hurricanes, wildfires, and climate-related regulations and the extent to which climate risks are priced into their market valuations. The research also exposes a costly divide – companies that proactively manage climate risks fare much better than those that ignore the threats.
Using textual analysis of earnings call transcripts from almost 5,000 U.S. public companies, researchers developed novel measures of firms’ physical climate risk exposure from weather extremes as well as the ‘transition risks’ that firms face from the global shift to a low-carbon economy, like shifting to renewable energy and reduced carbon emissions. They found companies facing high transition risks from things like emissions regulations tended to be valued at a discount by investors.
“In recent years, overall investor attention to climate change has increased,” explained Qing Li, Clinical Assistant Professor at the University of Florida Warrington College of Business. “As our research shows, companies that have high exposure to transition risk seem to be punished by markets.”