The Materiality and Measurement of Physical Climate Risk: Evidence from Form 8-K

Discussion Paper Series, LSE Department of Geography & Environment, 2020

46 Pages Posted: 7 Jan 2021

See all articles by Glen Gostlow

Glen Gostlow

London School of Economics & Political Science (LSE) - Department of Geography and Environment

Date Written: October 23, 2020

Abstract

Pricing firm-level exposure to physical risk, such as hurricanes, wildfires and floods, poses large informational challenges to investors and policymakers. This leads to difficulties in estimating how the market is pricing climate risk. This paper explores whether Form 8-K, a filing that allows firms to immediately report on unscheduled material events to shareholders, holds any relevant and latent information on physical risk. By utilising a simple textual approach, Form 8-K offers a way to identify material firm-level physical risk information related to severe weather and natural disasters. This paper also compares the measure to others in the literature. When compared to measures of keywords in annual reports, Form 8-K can detect realised and real-time physical risk from firms that predict they will be exposed. This allows for the validation of these less frequent and forward-looking measures. When compared to more frequent measures that utilise quarterly earnings call transcripts between managers and investors, Form 8-K identifies physical risk exposure that is not mentioned in the earnings calls. This is taken as evidence that Form 8-K may hold some latent real time information on physical risk exposure.

Keywords: climate change, climate risk, physical risk, Form 8-K, materiality

JEL Classification: G12, G14, Q54

Suggested Citation

Gostlow, Glen, The Materiality and Measurement of Physical Climate Risk: Evidence from Form 8-K (October 23, 2020). Discussion Paper Series, LSE Department of Geography & Environment, 2020, Available at SSRN: https://ssrn.com/abstract=3736100 or http://dx.doi.org/10.2139/ssrn.3736100

Glen Gostlow (Contact Author)

London School of Economics & Political Science (LSE) - Department of Geography and Environment ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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