Abstract
In alignment with the call in Engle et al. (2020) to improve the measurement of firm-level climate risk exposure, we explore usefulness of a firm-specific measure based on 10-K disclosures of climate risk. We find that our measure has incremental explanatory power for firm valuation over climate risk-related measures currently used in the literature. Further, our measure is broadly available, which extends the span of questions related to firm-specific climate risk that can be investigated. Corroborating its usefulness, we find that relative to hedge portfolios based upon the other measures, the return on a hedge portfolio that is long (short) on firms with high (low) values of our climate risk measure has the strongest negative association with a US-news based measure of climate change concerns. By exploiting the broad climate-related disclosures in 10-Ks, our measure provides a tool to better understand valuation implications of climate risk for firms.
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