Investors Want Climate Risk Disclosures

Accelerating climate change sparks greater interest in financial risks for public companies

Based on the research of Laura Starks

When people feel effects of climate change, it’s often in the form of extreme weather. Businesses, however, may soon feel it in their bank accounts. Failure to reduce carbon emissions could trim world economic output by 18% by 2050, according to a 2021 study by the insurance giant Swiss Re.

It’s no surprise, then, that investors are demanding information from public companies about the climate risks those businesses face. In a new study from Texas McCombs, Finance Professor Laura Starks finds that institutional investors want companies to report more about their climate risk.

Starks and her co-authors — Emirhan Ilhan of the National University of Singapore, Philipp Krueger of the University of Geneva, and Zacharias Sautner of the Frankfurt School of Finance & Management — surveyed 439 institutional investors. Their findings show:

• 79% consider climate risk disclosure to be at least as important as financial disclosure, while almost one-third consider it more important.

• 67% think existing company disclosures are not precise enough.

• 73% believe that standardized and mandatory climate risk reporting is necessary.

Several countries require mandatory disclosure of climate risks, and the Securities and Exchange Commission is considering a rule for the U.S.

“There has been an ongoing debate about the differences between mandatory and voluntary disclosure. Our work suggests that the current largely voluntary reporting regime does not enable fully informed climate-related investment decisions,” Starks says. “Our study shows that mandatory disclosure does have an effect on investors’ decisions.”

However, associated costs of disclosure can affect the demand, Starks says.

“The disclosures can be costly for companies,” she says. “Our evidence shows there are situations where they don’t appear to demand all disclosures from all firms because of the costs.”

To support the survey findings, the researchers also looked at data from CDP (formerly known as the Carbon Disclosure Project), which surveys companies every year on climate risks. They found that companies disclosed risks more fully if they had higher percentages of ownership from climate-conscious institutional investors.

Overall, the study adds to growing evidence that investors demand disclosure of climate risk, because that information can affect a company’s health and performance, Starks says. “Climate risk disclosure is financially material to the majority of institutional investors.”

“Climate Risk Disclosure and Institutional Investors” is published in the Review of Financial Studies.

Story by Sharon Jayson