Environmental reputation and bank liquidity: Evidence from climate transition

This study empirically investigates how a bank's nonfinancial signals of environmental reputation affect its deposits and credit provision in US counties with severe climate transition risks. We find that banks with higher reputational risks associated with environmental issues tend to experience declining deposits in counties exposed to severe climate change risks. Banks with a poor environmental reputation also reduce mortgage origination in such counties and diminish liquidity creation if they have high deposit shares in counties sensitive to climate transition. This study suggests that a bank's reputation regarding environmental, social and governance practices is an important underlying cause of bank liquidity in areas sensitive to climate change.     

极端气候对商业银行风险承担的影响——来自中国地方性商业银行的经验证据

深化对气候相关金融风险的认识,对于促进绿色低碳发展,防范系统性金融风险具有重要意义。本文以2004—2018年期间281家中国地方性商业银行为样本,实证检验了极端气候对银行风险承担的影响及其机制。研究发现,极端强降水气候显著提升了银行风险承担,极端高温和极端低温气候对银行风险承担不存在明显影响。极端强降水主要通过给银行信贷主体带来经济损失,影响违约概率和银行信贷资产质量,进而影响银行风险承担水平;提高灾前的保险保障水平、强化碳减排机制以及确保银行资本的充足性均有利于弱化极端气候对银行风险承担的影响;相较于以地级和省会城市工商业和居民为主要服务对象的地方性商业银行,极端强降水对以“三农”为主要服务对象的县域地方性商业银行风险承担的影响更大。因此,提升商业银行应对极端气候风险意识,提高气候灾害保险保障水平,强化碳减排机制和银行资本充足管理,均有利于降低极端气候对银行风险的影响。     

The impact of climate change on the cost of bank loans

We find robust empirical evidence that firms in locations with higher exposure to climate change pay significantly higher spreads on their bank loans. To alleviate the concerns related to using firms' headquarters in determining climate risk exposure, we exploit the economic link between a firm and its customers and find that the exposure of a firm's customers to climate risk also adversely affects that firm's cost of borrowing. In the cross-section, we find that the long-term loans of poorly rated firms drive the effect. Overall, our evidence suggests that lenders increasingly view climate change as a relevant risk factor.     

Risk-based thinking for extreme events: What do terrorism and climate change have in common?

Terrorism and climate change debates are often characterized by worst-case thinking, cost neglect, probability neglect, and avoidance of the notion of acceptable risk. This is not unexpected when dealing with extreme events. However, it can result in a frightened public, costly policy outcomes, and wasteful expenditures. The paper will describe how risk-based approaches are well suited to infrastructure decision-making for extreme events. Risk management concepts will be illustrated with current research of risk-based assessment of climate adaptation engineering strategies including designing new houses in Australia subject to cyclones and extreme wind events. It will be shown that small improvements to house designs at a one-off cost of several thousand dollars per house can reduce damage risks by 70%–80% and achieve billions of dollars of net benefit for community resilience—this helps offset some the predicted adverse effects of climate change for a modest cost. The effect of risk perceptions, insurance, and economic incentives is explored for another climate adaption measure. The paper will also highlight that there is much to be optimistic about the future, and in the ability of risk-based thinking to meet many challenges.     

Climate change financial risks: Implications for asset pricing and interest rates

In addition to tail macroeconomic events (e.g. wars, financial crises and pandemics), climate change poses a threat to financial stability — with extreme climatic events increasing in frequency and intensity and policy risks putting pressure on asset valuations. We study the effect of a changing climate on asset prices and interest rates through the lens of a dynamic CAPM with rare disasters, time-varying risk and recursive preferences. In our model, a changing climate makes tail events more frequent and less predictable, increasing the premium of climate risk; interestingly, this change may not be fully reflected in the overall market risk premium that includes both components of risk: macroeconomic and environmental. Our results also support the hypothesis of a declining real rate of interest as the planet warms, while the increasing risk of climate policy reduces the participation of brown assets in the market portfolio.     

Business strategies and management accounting in response to climate change risk exposure and regulatory uncertainty

This study aims to theorise and foster a better understanding of the strategies organisations adopt to respond to the risks and opportunities emerging from changing government climate change policies and the supporting management accounting adopted. Data include interviews and archival documents from five New Zealand electricity generators. We construct a theoretical framework that links climate change risks and opportunities to strategic responses. Climate change risk exposure increased during the period due to changes in the estimation/perception of climate change risks, market opportunities and regulatory uncertainty. Organisations' strategies changed in response, moving from a stable strategy to different combinations of anticipatory, proactive, and creative strategies, and finally regressing to a reactive strategy. Carbon management accounting changed to support the new strategy adopted in each time period. Long term physical and monetarised accounts for sustainability and extensive use of carbon information were prevalent during periods when the companies employed a proactive or creative strategy. In contrast, short-term physical accounts for unsustainability and limited use in decision-making were observed when the companies adopted stable, anticipatory or reactive strategies. Regulatory uncertainty was found to be the major constraint to a proactive strategy and carbon management accounting development in response to climate change.     

Modeling the global sovereign credit network under climate change

Climate change is becoming an urgent issue for the global economy. Our study employs a multivariate extreme value regression model that incorporates a LASSO-type estimator to investigate the tail dependence of the global sovereign credit default swap market conditional on climate change. Herein, we propose an extremal connectedness measure based on tail dependence to construct a sovereign credit network. The findings show that extreme weather or climate disasters significantly impact country-specific sovereign risk with heterogeneous network structure outcomes. Specifically, extreme weather conditions have a strong impact on countries' sovereign credit and magnify their influence on the global sovereign credit network. Furthermore, we identify an asymmetric risk spillover effect in the global sovereign credit network, where the degree of risk spillover is higher under extremely hot weather conditions. Our analysis provides new insights into the role of climate change in sovereign risk.     

Competitive advantage on a warming planet

Whether you're in a traditional smokestack industry or a "clean" business like investment banking, your company will increasingly feel the effects of climate change. Even people skeptical about global warming's dangers are recognizing that, simply because so many others are concerned, the phenomenon has wide-ranging implications. Investors already are discounting share prices of companies poorly positioned to compete in a warming world. Many businesses face higher raw material and energy costs as more and more governments enact policies placing a cost on emissions. Consumers are taking into account a company's environmental record when making purchasing decisions. There's also a burgeoning market in greenhouse gas emission allowances (the carbon market), with annual trading in these assets valued at tens of billions of dollars. Companies that manage and mitigate their exposure to the risks associated with climate change while seeking new opportunities for profit will generate a competitive advantage over rivals in a carbon-constrained future. This article offers a systematic approach to mapping and responding to climate change risks. According to Jonathan Lash and Fred Wellington of the World Resources Institute, an environmental think tank, the risks can be divided into six categories: regulatory (policies such as new emissions standards), products and technology (the development and marketing of climate-friendly products and services), litigation (lawsuits alleging environmental harm), reputational (how a company's environmental policies affect its brand), supply chain (potentially higher raw material and energy costs), and physical (such as an increase in the incidence of hurricanes). The authors propose a four-step process for responding to climate change risk: Quantify your company's carbon footprint; identify the risks and opportunities you face; adapt your business in response; and do it better than your competitors.     

Factors Influencing Corporate Environmental Disclosures

We investigate the effectiveness of the Carbon Disclosure Project (CDP), a not‐for‐profit organization that facilitates environmental disclosures of firms with institutional investors, thereby serving as a corporate governance mechanism for shareholders to influence the firm's environmental disclosures. We examine firm characteristics associated with firms' decisions to disclose carbon‐related information via the CDP for a sample of 319 Canadian firms over a four‐year period. In particular, we examine how firms' decisions to disclose via CDP are associated with shareholder activism, litigation risk, and the opportunity for low‐cost positive publicity once requested by the firms' “signatory” investors. Our results also show that management's decision to release climate change data is associated with domestic, but not foreign, signatory investors. We also find that disclosing firms tend to be those from lower polluting industries with less exposure to litigation risk. This suggests that this new form of coordinated shareholder activism may not be successful at altering the behavior of firms that are heavier polluters.     

Risk regulation,community pressure and the use of management accounting in managing climate change risk: Australian evidence

This exploratory study is amongst the first to investigate how companies perceive the regulation of carbon emissions and the pressure exerted by the community in an environment characterised by risk and uncertainty. Semi-structured interviews were conducted among 39 executives who were directly involved in carbon emissions management in 18 large listed Australian companies. Consistent with Prospect Theory, we find that decision-makers are threat biased and are more likely to take immediate actions when climate change issues are framed as threats as opposed to opportunities. From the interview data, it is seen that managers use management accounting techniques as a risk management tool in mitigating risks associated climate change issues. Furthermore, this use of management accounting appears to be driven primarily by the protection of economic interests, regulatory pressure and reputational pressure. The study provides insights into how perceptions of climate change uncertainties and external pressure for disclosure of emissions information influence companies to use management accounting in managing climate change risk.     

The relationship between risk experience and risk response: a study of farmers and climate change

Within the existing literature, the role of experience of risk on attitudinal and behavioural risk response has been relatively neglected. Recent research that draws on the psychological distance of climate change as a concept notes the importance of local, significant experience as a driver for encouraging appropriate response. The experience of flooding was used as the stimulus in this paper, and emphasis placed on whether direct and/or indirect experience of flood risk is associated with different responses to climate change risk. In order to explore the relationship between climate change risk experience and response in the form of on-farm mitigation and adaptation, this paper draws on a case study of farmers in England, many of whom have experienced flooding. Results from a quantitative survey undertaken with 200 farmers in Gloucestershire, England are discussed. Statistical analysis found experience of flooding to be significantly associated with a heightened concern for climate change. Although also finding an association between experience and behavioural response, the sample were most likely to be taking adaptive behaviour as part of normal practice, with factors such as lack of overall concern for climate change risk and absence of information and advice likely to be the main barriers to action. Risk communication needs to further emphasise the connection between climate change and extreme weather events to allow for farmers to perceive climate change as a relevant and locally salient phenomenon, and subsequent tailored information and advice should be offered to clearly illustrate the best means of on-farm response. Where possible, emphasis must be placed on actions that also enable adaptation to other, more immediate risks which farmers in this study more readily exhibited concern for, such as market volatility.     

Detecting local environmental change: the role of experience in shaping risk judgments about global warming

Anthropogenic climate change is increasing the frequency and severity of extreme weather events (e.g. flooding, heat waves, and wildfires). As a result, it is often reasoned that as more individuals experience unusual weather patterns that are consistent with changing climate conditions, the more their concern about global warming will increase, and the more motivated they will become to respond and address the problem effectively. Social science research evaluating the relationships between personal experiences with and risk perceptions of climate change, however, show mixed results. Here, we analyze a representative statewide survey of Floridians and compare their risk perceptions of five-year trends in climate change with local weather station data from the five years preceding the survey. The results show that Floridians are unable to detect five-year increases in temperature, but some can detect changes in precipitation. Despite an inability to detect the correct direction of change, respondents were significantly more likely than not to correctly identify the season in which most change occurred. Nevertheless, compared to local experience, risk perceptions of climate change were more strongly predicted by subjective experiences of environmental change, personal beliefs about climate change, and political ideology. Results from the study suggest that long-term changes in climate patterns and extreme weather events need to be interpreted by weather and climate experts within the context of climate change; individuals cannot be expected to detect or comprehend such complex linkages directly.     

Investor rewards to environmental responsibility: Evidence from the COVID-19 crisis

The COVID-19 shock and its unprecedented financial consequences have brought about vast uncertainty concerning the future of climate actions. We study the cross-section of stock returns during the COVID-19 shock to explore investors' views and expectations about environmental issues. The results show that firms with responsible strategies on environmental issues experience better stock returns. This effect is mainly driven by initiatives addressing climate change (e.g., reduction of environmental emissions and energy use), is more pronounced for firms with greater ownership by investors with long-term orientation and is not observed prior to the COVID-19 crisis. Overall, the results indicate that the COVID-19 shock has not distracted investors' attention away from environmental issues but on the contrary led them to reward climate responsibility to a larger extent.     

The impacts of climate policy uncertainty on stock markets: Comparison between China and the US

The interplay between climate policy uncertainty and stock market performance has emerged as a pressing research question in light of the challenges posed by climate change to financial markets. This paper measures China's daily and monthly climate policy uncertainty (CPU) from Jan 2000 to Mar 2022 based on Chinese news data for the first time. Then, the nonlinear and lag impacts of the US CPU and China's CPU on the return, volatility, correlation and tail dependence of China's and US stock markets are investigated and compared by adopting copula function and the distribution lag nonlinear model (DLNM). The data of stock markets includes the Shanghai Composite Index (SSCI) and NASDAQ from Jan 2000 to Mar 2022 from the Choice database, and the Shenzhen Composite Index (SCI) and S&P 500 are used for the robustness test. The empirical results indicate that (1) the growth trend of China’s CPU index is similar to that of the US. However, there are significant differences between the impacts of these two CPUs on stock markets. (2) For China, high CPU decreases current stock market return and increases volatility but decreases it in the future. It could also increase the upper tail dependence between China’s and the US stock markets’ volatilities in current period. (3) For the US, CPU decreases stock market return in the short term but increases it in the long term. High CPU increases volatility in short term, decreases volatility in 5 months and increases it again after 6 months. Both low and high CPU could increase the correlation between China's and US stock markets' volatilities.     

Do climate risk beliefs shape corporate social responsibility?

Global climate change is one of the most pressing issues of our time, potentially affecting everyone, both individuals and businesses. This paper examines whether differences in beliefs about climate change affect firms' decision-making in Corporate Social Responsibility (CSR) commitment. Using county-level climate change beliefs data from Yale Climate Opinion Maps, we find that firms' Environmental, Social, and Governance (ESG) scores are higher if they are located in counties where more people believe in global climate change. We then use natural disasters as exogenous shocks to the beliefs about climate risk and continue to find a positive association between CSR and perceptions of climate risks. Furthermore, we discover a stronger correlation between CSR and climate risk beliefs when firms have more local investors.     

European territories confronted with climate change: Awaiting the events or timely preparation?

Today, climate change is viewed as one of the main global challenges. The EU has become a major player in the political arena and seeks to reach worldwide agreements on ‘mitigation’ policies to reduce greenhouse gas emissions. Despite speaking with one voice at the global scale, the effects of climate change on European territories vary widely according to local circumstances. The ESPON scenarios explore what those impacts could be, and what effect EU climate change adaptation policies would have. The first scenario envisions an EU policy limited to emergency funds following extreme events like floods and droughts. In the second scenario, the EU takes a much more proactive stance by funding radical and costly adaptation strategies. The exercise demonstrates the difficulty in identifying the cost-effectiveness of each approach. Territorial effects are often indirect and affect a variety of economic, social and ecological systems. Moreover, a great deal of uncertainty exists surrounding their magnitude and timing.     

气候变化冲击下的涉农信用风险——基于2010-2019年256家农村金融机构的实证研究

气候变化可能导致的经济金融风险已经成为学术界关注的热点问题。本文首先分析了气候变化引发涉农金融风险的传导机制,以2010-2019年256家农村金融机构的经营数据为样本,将标准化后的年均气温作为刻画气候变化程度的核心指标,评估农村金融机构所在县域地理单元的气候变化程度对其信用风险的影响。研究发现,年均气温波动对农村金融机构的信用风险水平存在显著影响,且影响呈现阶段性特征;在4个季度中,冬季气温的波动对信用风险的影响最为突出;虽然城商行与农商行、村镇银行均是立足于服务地方经济发展的商业银行,但由于城商行的业务在地域上和行业上更为分散,气候变化未对其信用风险水平产生显著影响。为此,提出了开展压力测试、实施差异化监管和创新风险缓释工具三个方面的对策建议。本文为管理由气候变化导致的涉农信用风险提供了政策启示和决策参考。     

An inconvenient cost: The effects of climate change on municipal bonds

Counties more likely to be affected by climate change pay more in underwriting fees and initial yields to issue long-term municipal bonds compared to counties unlikely to be affected by climate change. This difference disappears when comparing short-term municipal bonds, implying the market prices climate change risks for long-term securities only. Higher issuance costs for climate risk counties are driven by bonds with lower credit ratings. Investor attention is a driving factor, as the difference in issuance costs on bonds issued by climate and nonclimate affected counties increases after the release of the 2006 Stern Review on climate change.     

Time-frequency spillovers among carbon,fossil energy and clean energy markets: The effects of attention to climate change

We explore the time-frequency spillovers among carbon, fossil energy and clean energy markets, and consider the casual effects of climate change attention. The spillover effects among carbon, fossil energy and clean energy markets are time-varying. Carbon market is a net receiver of spillovers from the oil market and clean energy markets in the short term, but it becomes a net transmitter of spillovers to the coal and gas markets in the long term. Our marginal spillover effects analysis suggests that the COVID-19 pandemic has increased cross-market risk contagion in the long term and that carbon market bears larger input risks. Investors' attention to climate change has significant causal effects on the spillovers, and the causal impact of climate change attention on total spillover has significantly increased during the COVID-19 pandemic. Our findings provide important guidelines for investment in environmental protection and demonstrate the importance of formulating differentiated policies for environmental protection in different time horizons.