Pricing Climate Change Exposure

55 Pages Posted: 25 Feb 2021 Last revised: 29 Jun 2022

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management; European Corporate Governance Institute (ECGI)

Laurence van Lent

Frankfurt School of Finance and Management

Grigory Vilkov

Frankfurt School of Finance & Management

Ruishen Zhang

Shanghai University of Finance and Economics

Date Written: April 24, 2022

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% to 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 the 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 ESG fund flows, and positively associated with climate change adaptation programs.

Keywords: climate finance, climate change exposure, climate risk premium, tail risk, climate change opportunities

JEL Classification: G18, G32, G38, Q54, Q55

Suggested Citation

Sautner, Zacharias and van Lent, Laurence and Vilkov, Grigory and Zhang, Ruishen, Pricing Climate Change Exposure (April 24, 2022). TRR 266 Accounting for Transparency Working Paper Series No. 49, Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3792366 or http://dx.doi.org/10.2139/ssrn.3792366

Zacharias Sautner

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Laurence Van Lent

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

Grigory Vilkov (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.vilkov.net

Ruishen Zhang

Shanghai University of Finance and Economics ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,342
Abstract Views
3,580
rank
20,993
PlumX Metrics