Supply Chain Climate Exposure

Financial Analysts Journal, 2023, 79(1): 58-76. DOI: 10.1080/0015198X.2022.2129946.

35 Pages Posted: 10 May 2022 Last revised: 28 Apr 2023

See all articles by Greg Hall

Greg Hall

affiliation not provided to SSRN

Kate Liu

affiliation not provided to SSRN

Lukasz Pomorski

AQR Capital Management, LLC

Laura Serban

AQR Capital Management

Date Written: May 31, 2022

Abstract

To manage climate risks, investors need reliable climate exposure metrics. This need is particularly acute for exposures along the supply chain, where climate risks are recognized as important but difficult to measure. We propose an intuitive metric that quantifies such exposures and validate it empirically. We show that climate supply chain risks are not subsumed by traditional climate data. For example, a company may seem green on a standalone basis, but may still have meaningful and potentially material climate exposure if it has customers, or suppliers, whose activities could be impaired by transition or physical climate risks. We also show that our measure helps explain market reactions around climate news and that its historical performance is consistent with the market pricing in such risks. Our metric is related to scope 3 emissions and may help capture economic activities such as emissions offshoring. However, unlike scope 3, it reflects the strength of economic linkages and the overall climate exposure of a firm’s customers and suppliers. Importantly, the data necessary to compute our measure is broadly accessible and arguably of a higher quality than the currently available scope 3 data. As such, our metric’s intuitive definition and transparency may be appealing for both investor and corporate decision makers.

Keywords: ESG, climate, carbon emissions, greenhouse gas emissions, scope 3, supply chain, emissions offshoring

JEL Classification: G11, G23, M14, Q01, Q5

Suggested Citation

Hall, Greg and Liu, Kate and Pomorski, Lukasz and Serban, Laura, Supply Chain Climate Exposure (May 31, 2022). Financial Analysts Journal, 2023, 79(1): 58-76. DOI: 10.1080/0015198X.2022.2129946., Available at SSRN: https://ssrn.com/abstract=4100847 or http://dx.doi.org/10.2139/ssrn.4100847

Greg Hall

affiliation not provided to SSRN

Kate Liu

affiliation not provided to SSRN

Lukasz Pomorski (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Laura Serban

AQR Capital Management ( email )

Greenwich, CT
United States

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