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Summary

Measuring Cities' Climate Risk Exposure and Preparedness
Author(s):
Shirley S. Lu, Harvard University
Anya Nakhmurina, Yale University
Discussant(s):
Ane Tamayo, London School of Economics
Abstract:

Lu and Nakhmurina construct new time-varying linguistic measures of city-level climate exposure and adaptation from cities' budgets, annual reports, and bond prospectuses. The researchers focus on flood risk, which enables us to construct a precise dictionary of exposure and adaptation keywords. Lu and Nakhmurina validate their measures by (1) showing increases in their textual measures after major climate events, and (2) showing that adaptation measures are associated with charges to capital and emergency funds. Lu and Nakhmurina find that climate-change adaptation is lower in cities that face capital constraints and for cities with Republican mayors. The second effect is muted in cities where residents report a higher concern for climate change. Additionally, municipal bond market lowers the climate risk premium when city-level adaptation is high.

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A Theoretical Framework for Environmental and Social Impact Reporting
Author(s):
Henry L. Friedman, University of California, Los Angeles
Mirko Heinle, University of Pennsylvania
Irina M. Luneva, University of Pennsylvania
Abstract:

Friedman, Heinle, and Luneva provide a theoretical framework for reporting of firms' environmental and social impact (ESI). Their model incorporates reporting features that affect the impact of ESI reporting on cash flows, stock prices, the stock price response to ESI reports, managerial efforts related to ESI, and greenwashing. In particular, Friedman, Heinle, and Luneva describe the implications of ESI report congruity, whether the report captures ESI inputs or outcomes, and the manager's tradeoffs regarding ESI efforts and reporting bias. Although stock price incentives tend to encourage ESI efforts and greenwashing simultaneously, ESI reports that capture ESI effects on cash flows tend to have a stronger price reactions than ESI reports that capture effects on ESI per se. ESI reports aligned with investors' aggregate preferences provide stronger incentives and lead to more positive outcomes than ESI reports that focus on either ESI or cash flow effects individually.

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Greenhouse Gas Disclosure and Emissions Benchmarking
Author(s):
Sorabh Tomar, Southern Methodist University
Discussant(s):
Ginger Zhe Jin, University of Maryland and NBER
Abstract:

In 2010, the United States mandated the reporting of greenhouse gas (GHG) emissions for thousands of manufacturing facilities. Studying this rule, and focusing on facilities for which emissions information was largely not available elsewhere, Tomar finds a 7.9% emissions reduction following disclosure. Tomar highlights the role of 'benchmarking'. Specifically, facilities are able to assess their own, relative GHG performance once they can observe their peers' disclosures. This benchmarking facilitates emissions reductions. In contrast, Tomar highlights uncertainty around whether measurement and reporting to the regulator alone, prior to disclosure, leads to emissions reductions. Lastly, Tomar shows that concern about future legislation partly motivates the observed responses. The main takeaway is that mandatory, granular disclosure can curb GHG emissions, and that benchmarking plays an important role in this process.

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Dissecting Green Returns
Author(s):
Lubos Pastor, University of Chicago and NBER
Robert F. Stambaugh, University of Pennsylvania and NBER
Lucian A. Taylor, University of Pennsylvania
Abstract:

Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the "greenium" widened, and U.S. green stocks outperformed brown as climate concerns strengthened. To show the latter, Pastor, Stambaugh, and Taylor construct a theoretically motivated green factor--a return spread between environmentally friendly and unfriendly stocks--and find that its positive performance disappears without climate-concern shocks. The factor lags those shocks, curiously, by about a month. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks.

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This paper was distributed as Working Paper 28940, where an updated version may be available.

A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios
Author(s):
Georgij Alekseev, New York University
Stefano Giglio, Yale University and NBER
Quinn Maingi, New York University
Julia Selgrad, New York University
Johannes Stroebel, New York University and NBER
Discussant(s):
Itay Goldstein, University of Pennsylvania and NBER
Abstract:

Alekseev, Giglio, Maingi, Selgrad, and Stroebel propose a new methodology to build portfolios that hedge climate change risks. Their quantity-based approach explores how mutual funds holdings change when the fund adviser experiences a local extreme heat event that shifts beliefs about climate risks. The researchers use the observed trading behavior to predict how investors will reallocate their capital when "global" climate news shocks occur, which shift the beliefs and asset demands of many investors simultaneously and thus move equilibrium prices. Alekseev, Giglio, Maingi, Selgrad, and Stroebel show that a portfolio that holds stocks that investors tend to buy after experiencing a local heat shock appreciates in value in periods with aggregate climate news shocks. Their quantity-based approach yields superior out-of-sample hedging performance compared to traditional methods of identifying hedge portfolios. The key advantage of the quantity-based approach is that it learns from cross-sectional trading responses rather than time-series price information, which is limited in the case of climate risks. Alekseev, Giglio, Maingi, Selgrad, and Stroebel also demonstrate the efficacy and versatility of the quantity-based approach by constructing successful hedge portfolios for aggregate unemployment and house price risk.

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Firm-Level Climate Change Exposure
Author(s):
Zacharias Sautner, Frankfurt School of Finance and Management
Laurence van Lent, Frankfurt School of Finance and Management
Grigory Vilkov, Frankfurt School of Finance and Management
Ruishen Zhang, Shanghai University of Finance and Economics
Abstract:

Sautner, van Lent, Vilkov, and Zhang introduce a method that identifies climate change exposure from earnings conference calls of 10,158 firms from 34 countries. The method adapts a machine learning keyword discovery algorithm and captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The exposure measures exhibit cross-sectional and time-series variations that align with reasonable priors, and these measures are better at capturing firm-level variation than are carbon intensities or ratings. The exposure measures capture economic factors that prior work has identified as important correlates of climate change exposure. In recent years, exposure to regulatory shocks negatively correlates with firm valuations.

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Carbon Beta: A Market-Based Measure of Climate Risk
Author(s):
Joop Huij, Erasmus University Rotterdam
Dries Laurs, Vrije Universiteit Amsterdam
Philip Stork, Vrije Universiteit Amsterdam
Remco Zwinkels, Vrije Universiteit Amsterdam
Abstract:

Climate change poses a major challenge to society and the economy. While many companies are expected to lose from climate change, others could gain. Despite sustainable investments standing at record highs, investors struggle to address climate risks. Huij, Laurs, Stork, and Zwinkels construct a proxy for a climate risk factor, the pollutive-minus-clean (PMC) portfolio, which captures unexpected changes in consumers' and investors' concerns regarding the climate. By regressing stock returns on the PMC factor the researchers obtain estimates of asset-level climate risk exposure: 'carbon beta'. Extensive validation of their estimates confirms that variation in climate risk exposures aligns with related studies and reasonable priors. Their measure has desirable properties regarding availability, coverage, and informativeness compared to alternative climate risk measures. Huij, Laurs, Stork, and Zwinkels study the interaction of carbon beta with several proxies for realisations in climate risk. Returns on stocks with high carbon betas are low during months in which the press reports more on climate change, during months in which temperatures are abnormally hight, and during periods of drought.

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Participants

Matthew Aks, U.S. Department of the Treasury
Jennifer Alix-Garcia, Oregon State University
Sarah C. Armitage, Harvard University
Lauren Beatty, University of Maryland
Matteo Benetton, University of California at Berkeley
Thomas Bourveau, Columbia University
Elise Breshears, Michigan State University
Fousseni Chabi-Yo, University of Massachusetts Amherst
Ujjayant Chakravorty, Tufts University
Nathan W. Chan, University of Massachusetts Amherst
Christopher M. Clapp, University of Chicago
Jonathan M. Colmer, University of Virginia
Anna M. Costello, University of Chicago
Dietrich Earnhart, University of Kansas
Timothy Fitzgerald, Texas Tech University
Eyal G. Frank, University of Chicago
Henry L. Friedman, University of California, Los Angeles
Aspen Fryberger Underwood, Clemson University
Justina Gallegos, Executive Office of the President
Pulak Ghosh, India Institute of Management Bangalore
Thomas J. Gilbert, University of Washington
Andrew Grant, Moody's
Jody Grewal, University of Toronto
Jeffrey Hales, University of Texas at Austin
William Hogan, Harvard University
Allan Hsiao, University of Chicago
Joop Huij, Erasmus University Rotterdam
Emirhan Ilhan, Frankfurt School of Finance and Management
Irene Jacqz, Harvard University
Kose John, New York University
Walter Eric Juzenas, U.S. Department of the Treasury
Dries Laurs, Vrije Universiteit Amsterdam
Seunghoon Lee, MIT
Rebecca Lester, Stanford University
Nafisa Lohawala, University of Michigan
Shirley S. Lu, Harvard University
Irina M. Luneva, University of Pennsylvania
David McLaughlin, Environmental Defense Fund
Robyn Meeks, Duke University
Christoph Meinerding, Deutsche Bundesbank
Ignacia Mercadal, University of Florida
Alexander Michaelides, Imperial College London
Giovanna Michelon, University of Bristol
Evan Michelson, Alfred P. Sloan Foundation
Anya Nakhmurina, Yale University
Lilian Ng, York University
Ariel Ortiz Bobea, Cornell University
Alexander Pfaff, Duke University
James Salo, S & P Global
Alberto Salvo, National University of Singapore
Zacharias Sautner, Frankfurt School of Finance and Management
Lee H. Seltzer, Federal Reserve Bank of New York
Ishita Sen, Harvard University
Sophie Shive, University of Notre Dame
Dora Simon, University of Stavanger
Katalin Springel, HEC Montreal
Philip Stork, Vrije Universiteit Amsterdam
Andrea Szabo, University of Houston
Andrea Tamoni, Rutgers University
Sorabh Tomar, Southern Methodist University
Marica Valente, ETH Zurich
Frederick van der Ploeg, University of Oxford
Rodrigo Verdi, Massachusetts Institute of Technology
Nicholas Vreugdenhil, Arizona State University
Wanyi Wang, University of California, Irvine
Paige E. Weber, University of North Carolina at Chapel Hill
Will Wheeler, Environmental Protection Agency
Brad Wible, Science Magazine
Remco Zwinkels, Vrije Universiteit Amsterdam

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