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Climate-risk materiality and firm risk

Author

Listed:
  • Ella Mae Matsumura

    (University of Wisconsin–Madison, Wisconsin School of Business)

  • Rachna Prakash

    (University of Mississippi, Patterson School of Accountancy)

  • Sandra C. Vera-Muñoz

    (University of Notre Dame, Mendoza College of Business)

Abstract

Managers are required to disclose material climate risk in Form 10-K, but their decision whether or not to disclose is confounded by the lack of consensus on whether climate risk is material to the firms, as well as uncertainty about enforcement of disclosure regulations. Using the SASB Materiality Map™ to proxy for market expectations of climate risk materiality, we test whether the association between disclosing climate risk in 10-Ks and firm risk (proxied by cost of equity (COE)) varies with market expectations of climate risk materiality. Using S&P 500 firms’ decisions whether to disclose climate risk in Form 10-K for 2008 to 2016, we find that disclosing firms’ COE is 27 bps lower than nondisclosing firms’ COE. In industries where the market expects climate risk to be material, disclosing firms’ COE is 50 bps lower than nondisclosing firms’, while in industries where the market does not expect climate risk to be material, disclosing firms’ COE is 23 bps lower than nondisclosing firms’. Our results indicate that markets use expectations of climate risk materiality to infer the credibility of managers’ climate risk disclosure decisions. Our research contributes to policy-making on climate risk disclosures in regulatory filings and informs the debate around the costs and benefits of the SEC’s current proposal to enhance climate risk disclosures.

Suggested Citation

  • Ella Mae Matsumura & Rachna Prakash & Sandra C. Vera-Muñoz, 2024. "Climate-risk materiality and firm risk," Review of Accounting Studies, Springer, vol. 29(1), pages 33-74, March.
  • Handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09718-9
    DOI: 10.1007/s11142-022-09718-9
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    More about this item

    Keywords

    Regulation S-K; Environmental risk; Climate change risk; Climate-related risk; SEC regulatory enforcement; Cost of equity capital;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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