Climate Risk Materiality and Firm Risk

66 Pages Posted: 15 Jun 2017 Last revised: 10 Feb 2022

See all articles by Ella Mae Matsumura

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Rachna Prakash

University of Mississippi - Patterson School of Accountancy

Sandra C. Vera-Munoz

University of Notre Dame - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: February 5, 2022

Abstract

Managers are required to disclose material climate risk (CR) in Form 10-K, but their decision whether or not to disclose is confounded by the lack of consensus on whether CR 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 CR materiality, we test whether the association between disclosing CR in 10-Ks and firm risk (proxied by cost of equity (COE)) varies with market expectations of CR materiality. Using S&P 500 firms’ decisions whether to disclose CR in Form 10-K for 2008 to 2016, we find that disclosing firms’ COE is 27 bps lower than nondisclosers. We also examine whether the association between disclosing CR and COE varies with the market expectations of CR materiality. In industries where the market expects CR to be material, disclosing firms’ COE is 50 bps lower than nondisclosers, while in industries where the market does not expect CR to be material, disclosing firms’ COE is 23 bps lower than nondisclosers. Our results indicate that markets use expectations of CR materiality to infer the credibility of managers’ CR disclosure decisions.

Keywords: Regulation S-K; Form 10-K; Mandatory disclosure; nonfinancial environmental risk; climate change risk; climate-related risk; SEC regulatory enforcement; cost of equity capital; self-selection; propensity score matching; doubly robust regression

JEL Classification: G18, G32, M14, M41

Suggested Citation

Matsumura, Ella Mae and Prakash, Rachna and Vera-Munoz, Sandra C., Climate Risk Materiality and Firm Risk (February 5, 2022). Available at SSRN: https://ssrn.com/abstract=2983977 or http://dx.doi.org/10.2139/ssrn.2983977

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

WI
United States

Rachna Prakash (Contact Author)

University of Mississippi - Patterson School of Accountancy ( email )

200 Conner Hall
University, MS 38677
United States

Sandra C. Vera-Munoz

University of Notre Dame - Department of Accountancy ( email )

248 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-9041 (Phone)
574-631-5255 (Fax)

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