Long-term Trends based Indicator for Climate Change Impact on Firms

The paper introduces a new methodology to quantify the risk posed by climate change on firms. Our climate change impact indicator (CCII) uses a statistical methodology to measure the impact of climate change in terms of the interaction between long-term trend characteristics of publicly listed firms' security returns and key climate variables. Segregating climate change variables into acute and chronic categories allows defining an acute or chronic CCII to identify their respective impact of climate change on firms. Implementing the CCII for a set of insurance, manufacturing and energy firms to label them with low, medium or high exposure to climate change risk, we find that the energy firms on average have the highest exposure to climate change risk, followed by insurance and manufacturing firms. A validation of the CCII is performed by comparing it against a Natural Language Processing (NLP) based climate change indicator constructed using the firms' 10-K annual report filings. The validation conducted for the set of insurance firms shows that the two methodologies produce generally consistent assessment of climate change impact for the firms