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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

Background and Context

Research Focus

The study develops a novel method to measure how companies are exposed to climate change by analyzing discussions in earnings conference calls between management and financial analysts.

Data Coverage

Analysis covers over 10,000 firms from 34 countries between 2002-2020, examining transcripts from quarterly earnings calls to capture climate-related discussions.

Methodology

Uses machine learning to identify climate-related language patterns, categorizing exposure into opportunities, physical risks, and regulatory risks related to climate change.

Top Industries Most Exposed to Climate Change

  • Electric and Gas Services show the highest climate change exposure, with a score nearly twice that of other sectors
  • Construction-related industries feature prominently in the top exposed sectors
  • Transportation Equipment ranks high due to transition pressures in vehicle manufacturing

Growth in Climate Change Discussions Over Time

  • Climate change discussions in earnings calls have increased significantly since 2002
  • Notable acceleration occurred after the 2015 Paris Agreement
  • Peak levels reached in recent years with about 4 climate-related bigrams per 1,000 words

Impact on Green Technology Job Creation

  • High climate change exposure leads to 109% increase in green technology job creation
  • Opportunity-focused firms show strongest job creation effects
  • Physical risk exposure has minimal impact on green job creation

Effect on Green Patent Innovation

  • Firms with higher climate exposure show 72% increase in green patent production
  • Regulatory exposure drives significant innovation in green technologies
  • Physical risk exposure associated with decreased green patenting

Impact on Options Market Risk Measures

  • Climate exposure significantly affects options market pricing
  • Higher exposure leads to increased tail risk expectations
  • Both downside protection and upside potential become more expensive

Contribution and Implications

  • Provides first comprehensive measurement of firm-level climate change exposure across global markets
  • Demonstrates clear link between climate exposure and real economic outcomes like green jobs and innovation
  • Shows how financial markets price climate risks through options and equity markets

Data Sources

  • Industry exposure chart based on Table III, showing top industries by climate change exposure
  • Time series visualization derived from Figure 3, Panel A showing CCExposure trends
  • Green jobs impact chart constructed from Table VII economic effects data
  • Patent innovation chart based on Table VIII showing effects on green patents
  • Options market chart created from Table IX showing risk measure changes