Is the Market Pricing Climate Change Risk?

Abstract

Climate change presents an imminent and impactful risk to business. I study the impact of climate change on business through an assessment of the stock market pricing of climate change risk. I combine weather and company location distribution data to construct a new measure of geographic exposure to climate change risk and use a novel dataset of climate change phrase counts from SEC 10-K report filings to construct a new company operational exposure metric. I regress excess stock returns from S&P500 constituents from 1994 to 2017 on these climate change exposure risk factors using Fama- Macbeth and portfolio sorting methodologies. The market pricing of climate risk premiums is ambiguous: the market does not price a risk premium on company geographic exposure to climate change risk but does prices a positive risk premium on company operational exposure. The pricing of these risk premiums is consistent over time.