Uncovering the intensity of climate risk and opportunity: Awareness and effectiveness

Abstract

This paper examines the effect of awareness regarding climate change risks and opportunities on the proactive carbon management systems of U.S. S&P 500 companies. We develop our hypotheses based on institutional theory, stakeholder theory, and prospect theory. Our findings indicate a significant positive association between our self-constructed measurement of company risk and opportunity awareness and carbon management practices. We observe that financially constrained firms exhibit a lesser response to both climate change risk and opportunity awareness. Additionally, we note that firms with low profitability are more responsive to climate change risks, whereas we found no evidence linking climate change opportunity awareness to carbon management systems, consistent with prospect theory. Finally, we investigate the impact of carbon management systems on carbon reduction performance to examine the effectiveness of such awareness. In summary, this study provides the first evidence of how awareness of climate risk and opportunity influences corporate carbon management practices in a U.S. setting. Our findings imply that awareness serves as the initial step in prompting positive actions to manage risks and capitalize on opportunities. These results offer novel insights and information relevant to the recent policy initiative aimed at transitioning climate risk disclosure from voluntary to mandatory.