Do investors care about disclosed climate change risk?

Abstract

In this paper we investigate whether firms’ climate change risk disclosures affect the cross-section of US stock returns. We use a dataset constructed by an Artificial Intelligence (AI) algorithm, fine-tuned by Kölbel et al. (2021b), to classify climate change risk disclosures into Physical and Transitional risks. We find that after the Paris Agreement the disclosure of physical risk is associated with a significant positive risk premium. This premium is consistent and not explained by industry variation or other well-known risk factors. We find no consistent premium related to the disclosures of transitional risk. Our results suggests that investors attention towards the disclosures of physical climate change risk increased after the Paris Agreement. Overall, we find that investors view the disclosures of physical climate change risk as informative and risk revealing.