New data suggests corporate valuation is boosted with proactive climate risk management, according to research by the University of Florida.

The study “quantified corporations’ exposure to climate change risks like hurricanes, wildfires, and climate-related regulations and the extent to which climate risks are priced into their market valuations.”

The research found that companies that proactively manage climate risks fare better than those that don’t.

Using textual analysis of earnings call transcripts from almost 5,000 U.S. public companies, researchers developed measures of firms’ physical climate risk exposure from weather extremes as well as the ‘transition risks’ that firms face from the global shift to a low-carbon economy, like shifting to renewable energy and reduced carbon emissions.

Companies facing high transition risks from things like emissions regulations tended to be valued at a discount by investors, the research found.

“In recent years, overall investor attention to climate change has increased,” explained Qing Li, clinical assistant professor at the University of Florida Warrington College of Business. “As our research shows, companies that have high exposure to transition risk seem to be punished by markets.”

There was no valuation decline in companies seen as actively working to adapt their business models and reduce climate impacts through strategies like increasing sustainable investments and green technologies, researchers found.

“These ‘proactive’ firms tend to ramp up sustainable innovations and avoid cuts to research spending as transition risks intensify,” the researchers noted.

Companies that consider transition risks but chose to take a passive stance tend to slash R&D budgets and jobs when facing higher climate exposure – a potential impediment to their long-term competitiveness, the study found.

“The divide in strategies and outcomes between proactive and non-proactive firms is quite stark,” noted researcher Yuehua Tang, Emerson-Merrill Lynch associate professor. “Companies being transparent about their climate vulnerabilities but also demonstrating tangible responses to mitigate those risks seem to be rewarded by markets.”

While there are costs for businesses that adapt to both physical and transitional climate risks, the study by Li, Tang, China Europe International Business School’s Hongyu Shan (Ph.D. ’19) and Georgia State University’s Vincent Yao suggests proactive efforts could actually boost valuations and preparedness as investors increasingly consider climate threats when making informed investment decisions.

“Corporate Climate Risk: Measurements and Responses” is published in The Review of Financial Studies. The research team also shares their climate risk measures at:

Original article written by Allison Alsup for the University of Florida.