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Firm-Level Climate Change Exposure

Journal: Journal of Finance

Date: 20230601

Author: Sautner, Zacharias; Van Lent, Laurence; Vilkov, Grigory; Zhang, Ruishen

Abstract:
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.

Link: Google Scholar

Key Findings

Climate Change Exposure Measurement

Developed a novel method to measure firm-level climate change exposure using earnings call transcripts, covering 10,000+ firms across 34 countries from 2002-2020

Green Technology Impact

Higher climate change exposure predicts increased green-tech job creation and green patent development in subsequent years

Financial Market Effects

Climate change exposure information is priced in options and equity markets, affecting risk premiums and return distributions

Industry Distribution of Climate Change Exposure

  • Electric, Gas & Sanitary Services show highest exposure (6.95)
  • Heavy Construction and Transportation Equipment follow with significant exposure levels
  • Substantial variation exists within industries, indicating heterogeneous climate impacts

Green Technology Job Creation Impact

  • 109% increase in green-tech jobs for one standard deviation increase in climate exposure
  • Strongest effects from opportunity exposure (79.5% increase)
  • Regulatory exposure drives 20% increase in green-tech jobs

Risk Premium in Options Market

  • Higher exposure associated with increased tail risks in options markets
  • Opportunity exposure leads to 4.3% increase in downside protection costs
  • 3.9% increase in upside potential costs for opportunity exposure

Contribution and Implications

  • First comprehensive measurement of firm-level climate change exposure across physical risks, regulatory changes, and opportunities
  • Demonstrates clear link between climate exposure and concrete business outcomes including green innovation and job creation
  • Provides evidence that financial markets price climate change exposure in sophisticated ways

Data Sources

  • Industry exposure chart based on Table III showing industry distribution of climate change exposure measures
  • Green technology job impact visualization derived from Table VII regression results
  • Risk premium charts constructed using data from Table IX showing forward-looking risk measures