No. 49: Pricing climate change exposure

Jahr: 2022

Typ: Working Paper

Open Science:

Gold

Abstract

We estimate the risk premium for firm-level climate change exposure from 2003 to 2019. Exposure is constructed from discussions of climate-related risks and opportunities in earnings calls. When extracted from realized returns, the unconditional risk premium is zero. This insignificant overall effect masks risk premium increases during the sample period, but with a slump in the financial crisis. Forward-looking proxies deliver an unconditionally positive expected risk premium, with subtle differences in the time series depending on the treatment of tail risks and opportunities. When the underlying model uses variance as the sufficient risk statistic, the premium gradually increases over time. When the model considers tails, the premium declines after 2015, because investors now link climate change exposure to higher opportunities and lower crash risk. This finding arises as the priced part of the risk premium primarily originates from climate-related opportunity shocks rather than downside physical or regulatory shocks.

Veröffentlichungsinformationen

TRR 266 researchers

Laurence van Lent Frankfurt School of Finance & Management

Laurence van Lent is a Professor of Accounting and Economics at the Frankfurt School of Finance and Management. His current research interests include the political economy of financial markets, the biological roots of executive behavior, and organizational design and performance management. He currently holds editorial responsibility at The Accounting Review and the Journal of Accounting Research, two of the leading journals in the field. Van Lent’s research has been published in top journals in economics, management, finance, and accounting. He is particularly interested in the education of Ph.D. students and among his past students are tenured professors at the University of Chicago, LBS, and Melbourne.

Ruishen Zhang Frankfurt School of Finance & Management

External researchers

Zacharias Sautner

Grigory Vilkov

DOI

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To cite this article

Sautner, Z., van Lent, L., Vilkov, G., & Zhang, R. (2022). Pricing climate change exposure. TRR 266 Accounting for Transparency Working Paper Series No. 49. https://dx.doi.org/10.2139/ssrn.3792366

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