Climate Solutions, Transition Risk, and Stock Returns

Using large language models to measure firms' climate solution products and services, we find that high-climate solution firms exhibit lower stock returns and higher market valuation multiples. Their stock prices respond positively to events signaling increased demand for climate solutions. These firms also show higher future profitability during periods of regulatory uncertainty, unexpected increases in climate concerns, and when a larger share of their sales occurs in states with climate plans and stronger public support for addressing climate change. Overall, our results indicate that high-climate solution firms, whose business benefits as climate transition risks materialize, hedge investors against such risks.

Keywords: JEL Classification: G12, G14, Q54, Q55 climate change opportunities, climate solutions, stock returns, transition risk, generative AI, machine learning

JEL Classification: G12, G14, Q54, Q55

Suggested Citation: Suggested Citation

Lu, Shirley and Riedl, Edward J. and Xu, Simon and Serafeim, George, Climate Solutions, Transition Risk, and Stock Returns (April 22, 2024). Harvard Business Working Paper No. 25-024, Harvard Business School Accounting & Management Unit Working Paper 25-024, Available at SSRN: https://ssrn.com/abstract=5018767 or http://dx.doi.org/10.2139/ssrn.5018767