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The materiality and measurement of physical climate risk: evidence from Form 8-K

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  • Gostlow, Glen

Abstract

Pricing firm-level exposure to physical risk, such as hurricanes, wildfires and floods, poses large informational challenges to investors and policymakers. This leads to difficulties in estimating how the market is pricing climate risk. This paper explores whether Form 8-K, a filing that allows firms to immediately report on unscheduled material events to shareholders, holds any relevant and latent information on physical risk. By utilising a simple textual approach, Form 8-K offers a way to identify material firm-level physical risk information related to severe weather and natural disasters. This paper also compares the measure to others in the literature. When compared to measures of keywords in annual reports, Form 8-K can detect realised and real-time physical risk from firms that predict they will be exposed. This allows for the validation of these less frequent and forward-looking measures. When compared to more frequent measures that utilise quarterly earnings call transcripts between managers and investors, Form 8-K identifies physical risk exposure that is not mentioned in the earnings calls. This is taken as evidence that Form 8-K may hold some latent real-time information on physical risk exposure.

Suggested Citation

  • Gostlow, Glen, 2020. "The materiality and measurement of physical climate risk: evidence from Form 8-K," LSE Research Online Documents on Economics 107045, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:107045
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    File URL: http://eprints.lse.ac.uk/107045/
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    References listed on IDEAS

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    Cited by:

    1. Ben Groom & Zachary Turk, 2021. "Reflections on the Dasgupta Review on the Economics of Biodiversity," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(1), pages 1-23, May.

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    More about this item

    Keywords

    climate change; climate risk; physical risk; Form 8-K; materiality;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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