Climate Risk and the Cost of Information Opacity in Supply Chains

Abstract

This paper examines to what extent information opacity exacerbates climate risks in supply chains. Understanding the information frictions in supply chain settings is important because disruptions originating from an opaque supplier can impose greater risk to the supply chain as a whole than those originating from a non-opaque supplier. Using proxies for the firm’s public information environments, we empirically examine the differential effects of information frictions during supply chain disruptions. Using natural disasters as firm-specific idiosyncratic climate shocks on suppliers, we find that customer firms suffer more when disrupted suppliers have opaque information environments. Moreover, these effects spill over further to other supply chain participants that are not directly linked to disrupted suppliers. These results are consistent with the disrupted firm’s information opacity exposing its trade partners to greater climate risks, resulting in greater economic losses. Additionally, we find that firms increasingly search their suppliers’ SEC filings when their suppliers are hit by climate-related shocks, suggesting trade partners find information in SEC filings useful despite extensive private information sharing. Overall, our paper speaks to the growing concerns over misinformation having a real impact during supply chain disruptions and highlights the role of public information environments in the context of supply chain climate risks.

Keywords: Climate Risk, Climate-related Disclosures, Inter-Firm Information Frictions, Shock Spillovers, Information Opacity, Propagation of Idiosyncratic Shocks, Supply chain disruption

JEL Classification: C67, C71, D82, L14, M41