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Pricing Climate Change Exposure

Author

Listed:
  • Zacharias Sautner

    (Frankfurt School of Finance & Management, 60322 Frankfurt am Main, Germany)

  • Laurence van Lent

    (Frankfurt School of Finance & Management, 60322 Frankfurt am Main, Germany)

  • Grigory Vilkov

    (Frankfurt School of Finance & Management, 60322 Frankfurt am Main, Germany)

  • Ruishen Zhang

    (Institute of Accounting and Finance, Shanghai University of Finance and Economics, 200433, Shanghai, China)

Abstract

We estimate the risk premium for firm-level climate change exposure among S&P 500 stocks and its time-series evolution between 2005 to 2020. Exposure reflects the attention paid by market participants in earnings calls to a firm’s climate-related risks and opportunities. When extracted from realized returns, the unconditional risk premium is insignificant but exhibits a period with a positive risk premium before the financial crisis and a steady increase thereafter. Forward-looking expected return proxies deliver an unconditionally positive risk premium with maximum values of 0.5%–1% p.a., depending on the proxy, between 2011 and 2014. The risk premium has been lower since 2015, especially when the expected return proxy explicitly accounts for the higher opportunities and lower crash risks that characterize high-exposure stocks. This finding arises as the priced part of the risk premium primarily originates from uncertainty about climate-related upside opportunities. In the time series, the risk premium is negatively associated with green innovation; Big Three holdings; and environmental, social, and governance fund flows and positively associated with climate change adaptation programs.

Suggested Citation

  • Zacharias Sautner & Laurence van Lent & Grigory Vilkov & Ruishen Zhang, 2023. "Pricing Climate Change Exposure," Management Science, INFORMS, vol. 69(12), pages 7540-7561, December.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:12:p:7540-7561
    DOI: 10.1287/mnsc.2023.4686
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    Citations

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    Cited by:

    1. Chen, Wen & Zhang, Qiuyue, 2025. "Can corporate climate risk drive digital transformation? Evidence from Chinese heavy-polluting enterprises," Technological Forecasting and Social Change, Elsevier, vol. 212(C).
    2. Costola, Michele & Vozian, Katia, 2025. "Pricing climate transition risk: Evidence from European corporate CDS," Energy Economics, Elsevier, vol. 143(C).
    3. Khadija S. Almaghrabi, 2025. "Climate Change Exposure and the Readability of Narrative Disclosures in Annual Reports," Sustainability, MDPI, vol. 17(11), pages 1-18, June.
    4. Chen, Yiyang & Mamon, Rogemar & Spagnolo, Fabio & Spagnolo, Nicola, 2025. "Stock market returns and climate risk in the U.S," Journal of Multinational Financial Management, Elsevier, vol. 77(C).
    5. Guesmi, Khaled & Makrychoriti, Panagiota & Pyrgiotakis, Emmanouil G., 2025. "Climate change exposure and green bonds issuance," Journal of International Money and Finance, Elsevier, vol. 152(C).
    6. Huang, Shupei & Wang, Xinya & Xue, Yi & Zhang, Xinzhi, 2025. "CEOS’ climate risk perception bias and corporate debt structure," Journal of International Money and Finance, Elsevier, vol. 151(C).
    7. Naseer, Mirza Muhammad & Guo, Yongsheng & Zhu, Xiaoxian, 2025. "The dynamics of corporate climate risk and market volatility: International evidence," The North American Journal of Economics and Finance, Elsevier, vol. 78(C).
    8. Trinh, Vu Quang & Nguyen, Nga & Le, Phuong & Nguyen, Thao Ngoc, 2025. "Unraveling the ‘green-default paradox’: Assessing the influence of gender-diverse boards and socially responsible ratings," International Review of Financial Analysis, Elsevier, vol. 102(C).
    9. Dallocchio, Maurizio & D’Ercole, Francesco & Frascati, Domenico & Mariani, Massimo, 2025. "Climate transition and the speed of leverage adjustment," International Review of Financial Analysis, Elsevier, vol. 102(C).
    10. Demetriades, Elias & Politsidis, Panagiotis N., 2025. "Bank lending to fossil fuel firms," Journal of Financial Stability, Elsevier, vol. 76(C).
    11. Wang, Yong & Wang, Chao, 2025. "Climate risk and firms’ R&D investment: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 99(C).
    12. Sofia Anyfantaki & Marianna Blix Grimaldi & Carlos Madeira & Simona Malovana & Georgios Papadopoulos, 2025. "Decoding climate-related risks in sovereign bond pricing: a global perspective," BIS Working Papers 1275, Bank for International Settlements.
    13. Naseer, Mirza Muhammad & Guo, Yongsheng & Zhu, Xiaoxian, 2025. "When climate risk hits corporate value: The moderating role of financial constraints, flexibility, and innovation," Finance Research Letters, Elsevier, vol. 74(C).
    14. Fan, Hanlu & Zhao, Keyi, 2025. "Uncovering the intensity of climate risk and opportunity: Awareness and effectiveness," The British Accounting Review, Elsevier, vol. 57(2).
    15. Shang, Yuping & Xiao, Zisheng & Nasim, Asma & Zhao, Xin, 2025. "Influence of ESG on corporate debt default risk: An analysis of the dual risk scenarios," Journal of International Money and Finance, Elsevier, vol. 151(C).
    16. Kanamura, Takashi, 2025. "A quantitative model of sustainability risk in finance," Journal of Commodity Markets, Elsevier, vol. 37(C).

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