Climate Risk Disclosures: Their Value for Firms and Analysts
Climate change is having an impact on every sector, including the financial sector. Firms are feeling pressure to disclose climate change risks, for example, physical risk due to sea-level rise and extreme weather, and the financial implications of climate-related risks.
Climate risk disclosures can help firms and investors better understand the climate risks, to better invest in capital and to make strategic long-term plans.
That is why Professor Wenxia Ge and co-applicant Professor Walid Ben Amar have received a Social Sciences and Humanities Research Council Insight Development Grant to study the impact of conference call disclosures on analyst earnings forecasts. Their project is titled Are climate risk disclosures in earnings conference calls relevant to analysts?
The professors will also examine the conditions in which climate risk disclosures are more useful for analysts to make accurate earnings forecasts.
New government disclosure requirements
In 2015, the Task Force on Climate-related Financial Disclosures (TCFD) was created, in association with the Financial Stability Board. This task force created a series of frameworks and recommendations for climate risk disclosures.
In the 2022 budget, section 3.4, the Government of Canada announced that starting in 2024, financial institutions will be required to publish climate change disclosures aligned with the TCFD framework. Despite these regulations, there are still firms that resist disclosing their climate risks.
It’s important to understand conference call climate risk disclosures, which are increasingly common, and how they affect forecasts. It is also valuable to understand which types of firms are more likely to give voluntary climate disclosures that are more informative, such as firms more directly impacted by extreme weather that is caused by climate change.
Professors Ge and Ben Amar will conduct a data analysis, extracting analysts’ earnings forecasts, and obtaining annual climate risk disclosure data.
This research will add to the literature pertaining to climate risk disclosures. It will also expand the literature on analyst forecast accuracy and evaluate when analysts incorporate voluntary conference call disclosures into their analysis.
The research could have practical implications as well. It may encourage firms to begin to disclose their climate risks and help to inform investors and analysts about the importance of gathering credible climate risk information. It may also highlight the importance of creating or changing the regulations to enforce climate risk disclosures.