Climate Change, Firm Performance & Investor Surprises

Research Retrieved: August 2019
Retrieve the paper from the SSRN


Central banks and financial regulators have recently expressed concerns that investors might not anticipate the effects of climate change. In this paper, Pankratz, Bauer and Derwall (2019) study two fundamental questions related to these concerns. Namely, whether physical climate risks do indeed affect the financial performance of listed firms, and, if so, whether investors are failing to anticipate these risks.

Key Findings

The net impact of extremely high temperatures across a wide range of industries is negative: Based on a sample of firms located in 57 countries linked with granular data on extreme temperature exposure, the estimates of this study indicate that one day of additional exposure to extreme heat reduces the average daily revenues and operating income by approximately 10%.

Analysts indeed do not seem to fully anticipate these economic repercussions: The deviation in analyst estimates from the firm’s actual financial performance becomes more negative when its heat exposure increases. The magnitude of this increase in errors, for instance with regard to pre-tax income projections, corresponds to the estimates of the performance decrease induced by heat.

Investors do not seem to fully anticipate the repercussions of heat, either: Firms’ returns after public earnings announcement become more negative after financial periods in which their heat exposure has increased compared to their average exposure. Hence, investors seem to be surprised by decreased earnings after periods with high exposure to heat, despite the fact that the information on the realized number of extreme temperatures for any individual firm was publicly available.

Relevance for Practice

The study closely connects to policy debates on climate-change-related disclosure and global warming as a systemic financial risk. Moreover, the results lend support to recent legislative initiatives in France and the European Union to emphasize the importance of climate risk disclosure in corporate and financial disclosure requirements.