Firm-level risk of climate change: Evidence from climate disasters

Abstract

While climate change impacts most regions, a company's physical location and geographic diversification could determine how it is affected by the risks associated with climate change. We explore information from extreme climate events to study whether and how they affect firm-level risks. The results indicate a positive association between a firm's exposure to catastrophic climate events, measured by headquarters and affiliation's locations and systematic and idiosyncratic volatility, suggesting that this risk is somewhat unpredictable and undiversifiable. Furthermore, geographic dispersion increases firms' exposure to extreme climate event risks. Our results also indicate that this effect is more pronounced in industries in which environmental issues are financially material and is mitigated by better environmental performance of the firm. In addition, the effect increases with investor awareness. Overall, our research contributes to a better understanding of businesses' exposure to the risks associated with climate change.