Climate Disclosure: Physical Climate Risk, Investor Demands, and Firms' Voluntary Disclosure Decisions

• Author(s) / Creator(s)

  • Banerjee, Sanjay

• SSHRC IDG awarded 2021: This study addresses a critical gap in the current understanding of climate risk and disclosure by linking (a) physical climate risk (i.e., risk of financial loss from climate disasters), (b) investor demand for disclosure about the same, and © firms’ response to both. We begin by constructing two firm-level measures relating to physical climate risk and investor demand for climate disclosure. We measure physical climate risk by a firm’s total expected losses from property damages due to climate disasters. Using machine learning, we measure investor demand for climate disclosure based on the extent to which climate disclosure is discussed in the firm’s shareholder resolutions and transcripts of its earnings conference calls. Next, we explore the determinants of companies’ voluntary climate disclosure decisions. We distinguish between mandatory disclosure based on the materiality principle and voluntary disclosure that is largely at the firm’s discretion. We posit that firms that have a high exposure to climate risk are more likely to be covered by the materiality principle in determining mandatory disclosure, obviating the need for additional voluntary disclosure. On the other extreme, firms with a low exposure to climate risk have little to gain from voluntary disclosure, given the fixed cost of disclosure and marginal benefits to investors. We submit that firms facing intermediate levels of climate risk are more likely to find voluntary disclosures to be useful. Our study is the first to connect the growing magnitude of climate risk affecting firms with investor demand for climate disclosure and provides novel measures of firm-level physical climate risk and investor demand for climate disclosure.

• Date created

  2021-02-01

• Subjects / Keywords

  • Insight Development Grant
  • IDG
  • SSHRC
  • Climate Disclosures
  • Physical Climate Risks
  • Investor Demands for Disclosure
  • Climate Disasters
  • Management
  • Environment and Sustainability
  • Climate Change
  • Business
  • Administrative Studies
  • Accounting
  • 2010AD-2020AD
  • North America
  • United States
  • Canada

• Type of Item

  Research Material

• DOI

  https://doi.org/10.7939/r3-ewjt-js67

• License

  ©️Banerjee, Sanjay. All rights reserved other than by permission. This document embargoed to those without UAlberta CCID until 2025.