Show & Tell: An Analysis of Corporate Climate Messaging and its Financial Impacts

As climate-induced physical and transition risks to corporations are becoming more and more material, investors are increasingly scrutinizing a patchwork of voluntary climate-related communications - namely public disclosures, emission reduction commitments, and soft information from earnings calls and other public announcements.

We observe, for large-cap U.S. firms, a rise in the frequency of all forms of climate communication from 2011-2020, as well as an outsized proliferation from firms in emission-intensive sectors. We also find evidence that a majority of firms are not decarbonizing on a sufficient trajectory to meet committed targets.

In regard to financial effects, we show that increased transparency from disclosure can offset a significant portion of the price-to-earnings discount associated with carbon emissions, especially for firms in energy and industrials. A similar effect is observed for positive climate-related sentiment during the Q&A section of earnings call. Commitments are shown to have a statistically insignificant impact on valuation.

Key Highlights

• We analyzed trends in and financial implications of corporate climate messaging- including disclosure, decarbonization commitments, and soft information from earnings calls- for Russell 3000 companies from 2011-2020
• Corporate messaging on climate-related topics has seen steady growth from 2011 to 2020, with firms increasingly disclosing emissions (+174% in Scope 1 disclosure), pledging to decarbonize their operations (+105% in CDP commitments) and communicating on climate risks and goals in soft information channels such as earnings calls (+67% in earnings call management section mentions, +75% in Q&A section mentions)
• Looking at firm-level decarbonization, we find that 72% of firms are behind on their commitments and will need to reduce emissions at a more aggressive yearly rate in order to meet their pledged targets
• We demonstrate that increased transparency from disclosure offsets, on average, 48% of the price-to-earnings valuation discount associated with carbon emissions. In particular, firms in emissions-intensive sectors, such as energy and industrials, receive outsized valuation gains from disclosure
• Positive climate sentiment during the investor Q&A section of earnings calls can also significantly offset the carbon valuation discount, but commitments are shown to have an insignificant impact on valuation

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