Climate Risk Materiality and Firm Risk

65 Pages Posted: 15 Jun 2017 Last revised: 20 Aug 2020

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: August 11, 2020

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 impute 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’ CR disclosures over nine years, we find that disclosing firms’ COE is 27 bps lower than nondisclosers overall. 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 market expectations of CR materiality allow inferences about the credibility of managers’ CR disclosure decisions.

Keywords: Regulation S-K; nonfinancial environmental risk; climate change risk; climate-related risk; regulatory enforcement; cost of equity capital; self-selection.

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 (August 11, 2020). 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 )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

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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