Show and Tell: An Analysis of Corporate Climate Messaging and Its Financial Impacts

With growing public attention to the risks posed by a changing climate, investors have increasingly scrutinized corporations about the environmental impact of their operations. Capital markets reflect this enhanced focus on climate change risks and the risks associated with a decarbonized energy transition. In our recent research, we show how such transition risk exposure is already priced into equities and bonds issued by publicly-traded corporations (Bolton and Kacperczyk, 2021; Lazard Climate Center, 2021; Bolton et al., 2022). This attention on firm-level greenhouse gas emissions has prompted corporations to assess their transition risk exposure and, in recent years, to communicate their assessments of and, in some cases, strategies for managing these risks.

In our recent study, we examine corporate communication strategies on climate change-related transition risk of Russell 3000 constituents over a 2011-2020. There are three complementary channels through which companies can communicate about their climate change-related risks and goals: 1) disclosure of greenhouse gas emissions from operations and supply chains, 2) commitments to reduce the carbon footprint of operations, supply chains, or investments, and 3) soft information messaging through earnings calls or press releases. We observe several patterns around climate communication.

• First, corporations have increased their disclosure of Scope 1 carbon dioxide emissions, those associated with activities inside the firm; Scope 2 emissions, those associated with the firm’s consumption of electricity produced off-site; and Scope 3 emissions, those associated with the carbon embedded in the firm’s supply chain or released downstream by subsequent consumers of the firm’s output. Specifically, Scope 1 emissions disclosure has increased by 174% and Scope 2 disclosure by 163% over 2011-2020. At present, about a quarter of all large cap U.S. firms provide some emissions disclosure. Less than 10% of corporations disclose their Scope 3 emissions, whether measured upstream in the supply chain or downstream to subsequent consumers.
• Second, corporate decarbonization commitments have become much more common over the past decade. The two most common corporate emission goal frameworks are through the CDP, which permits significant discretion in the timing and stringency of a firm’s emission goal, and the Science-Based Target Initiative (SBTi), which requires participating firms to select emission goals consistent with limiting global warming to no more than 1.5°C compared to pre-industrial temperatures. Since 2011, the number of CDP pledges has more than doubled. By 2020, about 15% of corporations had adopted an emission goal through the CDP and nearly 4% had done so through SBTi. Efforts in cutting emissions have lagged the ambition of emission goals. We evaluated corporations’ progress in reducing emissions, and we estimate that nearly three-quarters of companies with emission goals will need to accelerate their annual rate of emissions reductions in order to reach their targets.
• Third, representatives of corporations and those engaging them through earnings calls have addressed climate change, greenhouse gas emissions, and transition risk more with greater frequency in recent years. We scrape and analyze transcripts from earnings call reports for relevant climate and environmental-related bigrams. We find that corporate managers have discussed climate topics more frequently in the management update section of earnings calls, with the 2018-2020 average 67% greater than the corresponding 2011-2013 average. Similarly, the 2018-2020 average frequency of climate topic discussion in the Q&A section is 75% greater than the corresponding 2011-2013 average. Still, earnings calls remain a more sporadic form of climate information signaling, with only 5% of companies using this channel, relative to disclosure (26%) and commitments (19%).

While corporate climate messaging has incontrovertibly spread across disclosure, commitments, and earnings call communication, especially within the past five years, there is substantial variability in the relationships among different forms of climate messaging. Disclosure is found to be a key predictor of future decarbonization commitments, as firms that have disclosed have a 48% greater probability of making a future pledge. The subsequent effect on earnings call communications, however, is found to be largely nonexistent. Disclosing firms are only 1% more likely to discuss climate topics in future earnings call updates, and less than 1% more likely to be questioned by investors during Q&A. The predictive effects of disclosure on the actual sentiment score are also minimal. Very similar results on forecasting earnings call climate topic frequency and sentiment are observed for firms making commitments.

With corporations increasingly communicate about their greenhouse gas emissions and climate-related efforts, we then evaluate the implications for corporate emissions and valuations. First, we estimate the extent to which these three forms of climate communication predict future emissions. Firms disclosing emissions data have, on average, 21% lower emissions the following year than those which do not disclose. Initiating a CDP pledge has no statistically significant correlation with future emissions levels, though firms that have signed SBTi commitments, on average, have 21% lower emissions the following year than those which have not. These relationships most likely reflect a selection effect given that firms with lower emissions – and a lower emissions trajectory expected over time – are more prone to disclose and make an SBTi commitment in the first place. We also find a positive correlation between the commitment horizon and future emissions, which suggests that firms are less likely to take near-term emission reduction actions when they make longer-term pledges.

Second, we estimate the impacts of climate communication on price-to-earnings ratios. In an earlier study (Bolton et al., 2022) we found a valuation discount (lower P/E ratios) related to the size of a company’s carbon emissions. We find that disclosing Scope 1 emissions offsets a portion of that valuation discount: on average 48% of the P/E discount tied to emissions. Corporations in more emission-intensive industries offset a larger fraction of this offset, with energy corporations fully offsetting the discount and industrial firms offsetting about four-fifths of the discount through disclosure.

Decarbonization commitments produce the same directional valuation effects as disclosure, but at a much smaller magnitude and with limited statistical significance. With respect to earnings calls, we find interesting differences in valuation effects depending on whether climate topics are discussed during the management update section or during the investor Q&A section. We observe a negative P/E effect when climate topics are brought up during the management update, but no significant effect is found for the Q&A section. When we estimate the effect of the full set of communication measures, it becomes apparent that disclosure and Q&A section sentiment are the most significant predictors of valuation.

Over the past decade, investors have raised greater concern over the carbon footprint of the firms they invest in. In part, this reflects heightened distress about accelerating climate change and current and future climate change mitigation policy responses. In part, it reflects greater investor disquiet about the climate impact of their investment decisions. Both reasons would lead investors to demand better information about firms’ current emissions, likely trajectory of emissions, and the actions they undertake to reduce their emissions. Voluntary disclosure of corporate emissions, voluntary commitments into the near- to medium-future to reduce emissions, and discussions about climate change implications in earnings calls each provide opportunities for firms to communicate information to these interested investors.

The full paper is available for download here