Climate Risk Disclosure Research Articles

Insights from the mandatory insurer climate risk disclosure survey in the United States

AbstractWe document the implementation of the Insurer Climate Risk Disclosure Survey in the United States and provide an overview of its historical development since 2009. By 2020, the Survey is mandatory in 15 states or jurisdictions for insurers that meet the premium threshold. We find that the coverage of the Survey has reached 80% of Property & Liability premiums and close to 100% of life premiums, but the majority of US insurers—especially small or less diversified insurers who are most vulnerable to climate risk—are not covered by this survey. We highlight research opportunities exploiting the unique institutional setting of the Survey while also documenting the caveats of the Survey.

“Accelerating institutional funding of low-carbon investment: The potential for an investment emissions intensity tax”

To encourage a step change in private finance for low-carbon investment, we examine the potential of taxing institutional investment funds (investment emissions intensity taxation, IEIT) if the emissions intensity of their portfolios exceeds specified thresholds. We examine how IEIT would impacts assets' relative expected rates of return, using a hypothetical diversified portfolio comprising the constituents of a leading market index. IEIT exerts a price influence on the flow of corporate capital expenditures financed either by capital-raising or by corporate retained earnings, encouraging both standalone low-carbon projects and more energy-efficient replacement of process-embedded fixed assets. IEIT must be a forward-looking tax with a pre-specified profile of reducing emissions intensity threshold levels to avoid potential offshoring of investment due to its significant impact on the cost of capital for high emissions intensity companies. IEIT challenges regulated investors to match their net zero declarations with actions, and acts as a policy backstop if emissions trading prices and coverage remain too low, or in case climate risk disclosure and investment taxonomy policies alone do not shift investment behaviours sufficiently.

Climate Risk Disclosure and Institutional Investors

Abstract Through a survey and analyses of observational data, we provide systematic evidence that institutional investors value and demand climate risk disclosures. The survey reveals the investors have a strong demand for climate risk disclosures, and many actively engage their portfolio firms for improvements. Empirical analyses of holdings data corroborate this evidence by showing a significantly positive association between climate-conscious institutional ownership and better firm-level climate risk disclosure. We establish further evidence of institutional investors’ influence on firms’ climate risk disclosures by examining a shock to the climate risk disclosure demand of French institutional investors (French Article 173). Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Corporate net zero pledges: a triumph of private climate regulation or more greenwash?

ABSTRACT Corporate pledges to achieve net zero greenhouse gas emissions in line with the international Paris Agreement on climate change are proliferating around the world, including in Australia. Regulatory drivers include corporate law obligations to identify, disclose and manage climate-related financial risks, as well as a complex web of rapidly developing private regulatory initiatives. Non-state actors such as institutional investors, industry bodies and civil society, are increasingly involved in developing best practice standards for climate risk disclosure and management, engaging with companies to drive their uptake, and in some cases, litigating to embed best practice expectations and hold companies accountable for their climate commitments and performance. Although underlying corporate law obligations are climate-neutral and focus on transparency and process, the associated private climate regulation is increasingly organised around substantive Paris-aligned standards. Drawing on an empirical study of large Australian listed companies, this article explores whether private climate regulation is helping to drive robust corporate climate commitments, target-setting and associated activities, which have the potential to deliver real-world emissions reductions.

Climate Risk Disclosure and Risk Sharing in Financial Markets

Climate Risk Disclosure and Risk Sharing in Financial Markets

Mandatory Climate Risk Disclosure, Housing Prices, and Credit Supply

Mandatory Climate Risk Disclosure, Housing Prices, and Credit Supply

Climate risk disclosures and global sustainability initiatives: A conceptual analysis and agenda for future research

AbstractClimate change impacts, risks and sustainability disclosures have attracted increasing attention from scholars in various streams of the economics and finance literature towards achieving the UN's Sustainable Development Goals (SDGs). Within the stream of climate finance, the global initiatives for corporate social responsibility (CSR) and environment, social and governance (ESG) practices have had important roles in leveraging firms to become more actively involved in environment‐related disclosure, in which climate risk reporting is central to evaluating whether and to what extent a firm and its operations are friendly to the environment. Along with the growth of the UN Principles for Responsible Investing in 2005, one of the most recent global initiatives that has been formed is the Taskforce on Climate‐Related Financial Disclosures (TCFD), which has considered the climate‐related financial disclosure recommendations of G20 finance ministers. Given that TCFD recommendations have recently been released for a broad domain of players (such as banks, investors, insurers and governments) in various countries (e.g., New Zealand, the United States and Japan), we surveyed the most recent studies on the TCFD by using a conceptual framework for climate‐related disclosures focusing on studies published worldwide. On the basis of a thorough review, we highlight the essential functions of financial markets and also provide the critical implications for different market players ranging from providers to supporters of the TCFD. Our study offers a timely conceptual review of the TCFD which is critical for stimulating sustainable investments, climate finance and enhanced corporate reporting.

Symbol or substance? Scrutinizing the ‘risk transparency premise’ in marketized sustainable finance: The case of TCFD reporting

AbstractContemporary forms of “marketized” sustainable finance rely on the production, dissemination, and consumption of financialized ESG risk information. In this paper, we scrutinize this “risk transparency premise” in context of the TCFD's climate risk reporting framework. Adopting the lens of institutional theory and a mixed methods approach, we pursue two interrelated aims. First, we examine to which extent the climate risk disclosures of TCFD “supporters” from the European financial sector adhere to the information requirements spelled out in the TCFD framework. Second, we seek to uncover the organization level impediments that underlie substantive implementation of the TCFD framework and, in turn, the production and dissemination of the required climate risk information. Based on our findings, we argue that TCFD/climate risk reporting is prone to become a ‘ceremonial’ practice and that, at least as of now, the ‘institutional myth’ of risk transparency might rather serve to safeguard the ideals of the market as opposed to facilitate transformative change towards a more environmentally sustainable economy. Our findings complement research that has problematized contemporary forms of marketized sustainable finance as well as literature on climate risk reporting and TCFD more specifically.

Aligning Private Climate Risk Management to Paris Climate Goals: An Australian Perspective

Climate change is now clearly recognised as a source of financial risk for private sector actors. In Anglo-American jurisdictions like Australia, corporate law and prudential regulatory frameworks contain obligations to identify, disclose and manage material financial risks that can be applied to climate-related risks. These legal frameworks have served as a foundation for the emergence of a range of private regulatory initiatives which seek to develop and apply best practice standards for climate risk disclosure and management, and which involve a range of different actors in driving the uptake of, and seeking to enforce, these standards. This paper explores the body of emerging private climate risk regulation, focusing particularly on the central organising theme of these initiatives: aligning private climate risk management to the climate mitigation goals of the international Paris Agreement. It outlines the way in which Paris-alignment and net-zero emissions are emerging as new norms guiding private sector approaches to climate change and explores how this interacts with and builds on essentially climate-neutral, risk-based corporate law and prudential regulatory frameworks. While there is considerable potential in Australia for Paris-aligned private risk management to contribute meaningfully to achieving international climate mitigation goals, there are also well-founded concerns about the effectiveness of these private measures that require further investigation.

In search of climate distress risk

Using the Merton distance to default model we investigate whether a firm's climate risk affects its default (distress) risk. S&P 500 non-financial firms during 2010–2019 are analysed and we employ both corporate carbon footprints and climate risk disclosures in annual filings to measure climate risk. Our results show that climate risk has a negative impact on firms' distance to default. This impact is limited to the disclosure of transition risk in annual filings. In contrast, disclosures of physical or non-specific risk do not affect firm-level default risk, while the impact of corporate carbon footprints is inconsistent but insignificant in most models. We also find that the negative effect of climate transition risk on firms' distance to default is stronger for firms headquartered in states with carbon pricing (California and states covered by the Regional Greenhouse Gas Initiative) and temporarily strengthens because of the Paris Agreement in 2015. However, this ‘Paris’ effect is short-lived and fades away in subsequent years.

Climate risk and financial disclosure in salmon aquaculture

The growth of the salmon aquaculture industry has attracted an increasing number of investors. Investors are conscious of economic consequences of climate change for the salmon farming companies, hence their demand for climate-related financial disclosure has increased. This study discusses potential climate-related financial impacts imposed on the salmon aquaculture production as identified by the Task Force on Climate-related Financial Disclosure (TCFD). We use data from 2016 to 2021 available on the Carbon Disclosure Project (CDP) platform, and we show to what extent salmon aquaculture companies disclose their climate-related risks. We find that when the demand of investors for climate-related financial disclosure increases, more firms tend to comply with their requests, while based on the CDP’s evaluation system, the firms perform better in minimizing their carbon impact. We argue that when salmon aquaculture companies publish their climate-related financial disclosure, they ensure transparency for their investors and secure a smooth transition into a low carbon economy.

Climate-risk materiality and firm risk

Managers are required to disclose material climate risk in Form 10-K, but their decision whether or not to disclose is confounded by the lack of consensus on whether climate risk is material to the firms, as well as uncertainty about enforcement of disclosure regulations. Using the SASB Materiality Map™ to proxy for market expectations of climate risk materiality, we test whether the association between disclosing climate risk in 10-Ks and firm risk (proxied by cost of equity (COE)) varies with market expectations of climate risk materiality. Using S&P 500 firms’ decisions whether to disclose climate risk in Form 10-K for 2008 to 2016, we find that disclosing firms’ COE is 27 bps lower than nondisclosing firms’ COE. In industries where the market expects climate risk to be material, disclosing firms’ COE is 50 bps lower than nondisclosing firms’, while in industries where the market does not expect climate risk to be material, disclosing firms’ COE is 23 bps lower than nondisclosing firms’. Our results indicate that markets use expectations of climate risk materiality to infer the credibility of managers’ climate risk disclosure decisions. Our research contributes to policy-making on climate risk disclosures in regulatory filings and informs the debate around the costs and benefits of the SEC’s current proposal to enhance climate risk disclosures.

Climate risk disclosure and stock price crash risk: The case of China

Climate change is a major and complex challenge currently facing the global economy, and significantly impacting the valuation of global financial assets and the financial system's stability. When the stock prices of large-scale listed companies fall sharply in a short time, we consider that a stock price crash. This paper constructs a novel measure of climate risk disclosure at the firm level by adopting a textual analysis method. We study whether climate risk exposure in listed company announcements can effectively reduce stock price crash risk. Studies have shown that, the more companies are concerned and disclose climate risk more positively, the lower the risk of stock price crash they face in the future. In addition, compared to alleviating the information asymmetry between internal managers and external investors, enhancing information disclosure to mitigate the risk of a stock price crash in the future is mainly achieved through the channel of raising the public's awareness of climate risk. Moreover, the mitigation effect of information disclosure related to climate risk on future stock price crash risk is more evident in manufacturing, mining, energy, agriculture, forestry, animal husbandry, and fishery directly threatened by climate change. In general, we encourage corporates to disclose the potential risks of climate change in the announcement of quarterly and annual reports in a standardized format.

What Can Machine Learning Teach Us about Australian Climate Risk Disclosures?

There seems to be no agreed taxonomy for climate-related risks. The information in firms’ climate risk disclosures represents a new resource for identifying the priorities and strategies of Australian companies’ management of climate risk. This research surveys 839 companies listed on the Australian Stock Exchange for the presence of climate risk disclosures, identifying 201 disclosures on climate risk. The types of climate risks and the risk management strategies were extracted and evaluated using machine learning. The analysis revealed that Australian firms are focused on acute physical climate risks, followed by market and regulatory risks. The predominant management strategy for these risks was to use a risk reduction approach, rather than avoiding or transferring risk. The analysis showed that key Australian industry sectors, such as materials, banking, insurance, and energy are focusing on different mixtures of risk types, but they are all primarily managing risks through risk-reduction strategies. An underlying driver of climate risk disclosure was composed of the financial implications of climate risk, particularly with respect to acute physical risks. The research showed that emission reductions represent a primary consideration for Australian firms in their disclosures identifying how they are responding to climate risk. Further research using machine learning to evaluate climate risk disclosure should focus on analysing entire climate risk reports for key topics and trends over time.

Ask BERT: How Regulatory Disclosure of Transition and Physical Climate Risks Affects the CDS Term Structure

Abstract We use BERT, an AI-based algorithm for language understanding, to quantify regulatory climate risk disclosures and analyze their impact on the term structure in the credit default swap (CDS) market. Risk disclosures can either increase or decrease CDS spreads, depending on whether the disclosure reveals new risks or reduces uncertainty. Training BERT to differentiate between transition and physical climate risks, we find that disclosing transition risks increases CDS spreads after the Paris Climate Agreement of 2015, while disclosing physical risks decreases the spreads. In addition, we also find that the election of Trump had a negative impact on CDS spreads for firms exposed to transition risk. These impacts are consistent with theoretical predictions and economically and statistically significant.

Climate risk disclosure and climate risk management in UK asset managers

PurposeFramed within global policy debates over the need for private financial flows to align with the capital requirements of the Paris Agreement, this paper examines UK asset managers in their approaches to disclosing and managing climate risk. This paper identifies and evaluates climate risk management practices among this under-researched investor group in their capacity to address fundamental behavioural obstacles to low-carbon investment.Design/methodology/approachThis paper takes an inductive approach to document analysis, applying content and thematic analysis to the annual disclosures of the 28 largest UK asset managers (by assets under management), including the investment management arms of insurance and pension companies.FindingsThe main takeaway from this research is that today’s climate risk management strategies hold potential to effectively address traditionally climate risk-averse investor behaviour and investment processes in the UK asset management context. However, this research finds that the use of environmental, social and governance (ESG) investment strategies to mitigate climate risks is a “grey area” in which climate risk management practices are undefined within broad sustainability and responsible investment agendas. In doing so, this paper invites further research into the extent to which climate risks are considered in ESG investment.Originality/valueThis paper contributes to research in sustainable finance and behavioural finance, by identifying the latest climate risk management techniques used among UK-headquartered asset managers and uniquely evaluating these in their capacity to address barriers to low-carbon investment arising from organisational behaviours and processes.

Cheap talk and cherry-picking: What ClimateBert has to say on corporate climate risk disclosures

Disclosure of climate-related financial risks greatly helps investors assess companies’ preparedness for climate change. Voluntary disclosures such as those based on the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) are being hailed as an effective measure for better climate risk management. We ask whether this expectation is justified. We do so by training ClimateBERT, a deep neural language model fine-tuned based on the language model BERT. In analyzing the disclosures of TCFD-supporting firms, ClimateBERT comes to the sobering conclusion that the firms’ TCFD support is mostly cheap talk and that firms cherry-pick to report primarily non-material climate risk information.

Taming the Green Swan: a criteria-based analysis to improve the understanding of climate-related financial risk assessment tools

ABSTRACT Understanding climate-related risks has become a key priority in financial decision-making and for regulatory supervision in the financial sector since the Task-force on Climate-related Financial Disclosures (TCFD) launched its recommendations on climate risk disclosures in 2017. However, a systematic approach to identify scientifically sound and decision-useful climate risk indicators and the tools to derive such risk metrics is still missing. Focusing on climate-related financial transition risks, we propose a set of analysis criteria rooted in climate science, economics, finance, and risk management, to assess whether climate transition risk analysis tools provide high quality, comparable, and decision-relevant results. We find that for a sample of 16 climate transition risk tools, some tools perform high on all criteria, but that especially model transparency, scenario flexibility, output-related uncertainties, and assumptions communication require considerable improvements. Financial supervisors and regulators should define appropriate ways to obtain comparable climate risk metrics, to ensure their interpretability, and to ensure that climate risk metric disclosures reflect the underlying assumptions and uncertainties surrounding the analyses. Researchers and any user of climate risk metrics should carefully understand and report the analysis tools’ setup, and interpret their findings in light of the analysis assumptions. Key policy insights Providers of climate risk analysis tools should increase transparency on the tools’ setup in standardized templates. Reporting templates should include information on whether the tool has been peer-reviewed, the depth of risk analysis, key modelling steps and underlying assumptions. Firms should report the tool setup and modelling assumptions in their voluntary climate-related disclosures. In addition, uncertainties surrounding the analysis should be reported, for example, via confidence intervals or probability distributions. Financial regulators and corporate reporting regulation should ensure that mandatory climate risk disclosures are understandable and comparable. Regulators should ask firms to disclose their risks based on harmonized climate risk metrics disclosure templates, to ensure that key assumptions, the model setup, limitations of the analyses and analysis uncertainties are reported alongside the metrics.

The Information Content of Managers’ Climate Risk Disclosure

The Information Content of Managers’ Climate Risk Disclosure

Insights from the Mandatory Insurer Climate Risk Disclosure Survey in the U.S.

Insights from the Mandatory Insurer Climate Risk Disclosure Survey in the U.S.