Pricing Climate Change Exposure

42 Pages Posted: 25 Feb 2021 Last revised: 30 Apr 2021

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Laurence van Lent

Frankfurt School of Finance and Management

Grigory Vilkov

Frankfurt School of Finance & Management

Ruishen Zhang

Shanghai University of Finance and Economics

Date Written: February 24, 2021

Abstract

We estimate the risk premium for firm-level climate change exposure from 2003 to 2019. Exposure is constructed from discussions of climate-related risks and opportunities in earnings calls. When extracted from realized returns, the unconditional risk premium is zero. This insignificant overall effect masks risk premium increases during the sample period, but with a slump in the financial crisis. Forward-looking proxies deliver an unconditionally positive expected risk premium, with subtle differences in the time series depending on the treatment of tail risks and opportunities. When the underlying model uses variance as the sufficient risk statistic, the premium gradually increases over time. When the model considers tails, the premium declines after 2015, because investors now link climate change exposure to higher opportunities and lower crash risk. This finding arises as the priced part of the risk premium primarily originates from climate-related opportunity shocks rather than downside physical or regulatory shocks.

Keywords: climate finance, climate change exposure, climate risk premium, tail risk, climate change opportunities

JEL Classification: G18, G32, G38, Q54, Q55

Suggested Citation

Sautner, Zacharias and van Lent, Laurence and Vilkov, Grigory and Zhang, Ruishen, Pricing Climate Change Exposure (February 24, 2021). TRR 266 Accounting for Transparency Working Paper Series No. 49, Available at SSRN: https://ssrn.com/abstract=3792366 or http://dx.doi.org/10.2139/ssrn.3792366

Zacharias Sautner

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Laurence Van Lent

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

Ruishen Zhang

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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