Pricing Climate Change Exposure

We estimate the risk premium for firm-level climate change exposure among S&P 500 stocks and its time-series evolution between 2005 to 2020. Exposure reflects the attention paid by market participants in earnings calls to a firm’s climate-related risks and opportunities. When extracted from realized returns, the unconditional risk premium is insignificant but exhibits a period with a positive risk premium before the financial crisis and a steady increase thereafter. Forward-looking expected return proxies deliver an unconditionally positive risk premium with maximum values of 0.5%–1% p.a., depending on the proxy, between 2011 and 2014. The risk premium has been lower since 2015, especially when the expected return proxy explicitly accounts for the higher opportunities and lower crash risks that characterize high-exposure stocks. This finding arises as the priced part of the risk premium primarily originates from uncertainty about climate-related upside opportunities. In the time series, the risk premium is negatively associated with green innovation; Big Three holdings; and environmental, social, and governance fund flows and positively associated with climate change adaptation programs. This paper was accepted by Colin Mayer, Special Section of Management Science on Business and Climate Change. Funding: Funding is provided by the Deutsche Forschungsgemeinschaft [Grant 403041268 – TRR 266] (L. van Lent and R. Zhang), the Institute for New Economic Thinking (L. van Lent), the 111 Project [Grant B18033] (R. Zhang), the Shanghai Pujiang Program (R. Zhang), and the Ministry of Education Project of Key Research Institute of Humanities and Social Science (R. Zhang). Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4686 .