Greenhushing: Investor reactions to climate disclosures
When companies disclose how they are preparing for climate change, how do their investors react? Professor Simone Varotto explores.
As climate change accelerates, it brings with it more natural disasters like floods, hurricanes, wildfires and drought, all of which pose significant physical risks to businesses across the globe. As such, investors are increasingly focused on how companies disclose their exposure to climate risk and their strategies for adaptation.
Climate adaptation disclosure involves businesses reporting their measures to adapt to the physical risks posed by climate change. Such disclosures are intended to demonstrate to investors how well-prepared companies are for handling climate-related disruptions. You’d expect these disclosures to lead to substantial benefits in preserving firm value and raising investor confidence, but you’d be wrong.
To understand how different types of climate-related disclosure affect a company's stock price performance in the wake of natural disaster events that hit a firm's location, we carried out a study at Henley Business School analysing the financial reports of UK publicly listed firms from 1996-2018.
Using text analysis techniques, we categorised them into three groups:
- Those not disclosing any information about physical climate risks.
- Those disclosing exposure to physical climate risks.
- Those disclosing exposure to risks as well as details on climate adaptation strategies.
Our findings revealed a surprising dichotomy.
Firms that disclosed their exposure to climate risks saw lower declines in stock price after a disaster compared to firms with no disclosure. This suggests that such disclosures help mitigate investor uncertainty and protect company value.
By contrast, disclosing climate adaptation strategies did not provide the same beneficial effect on stock prices. In fact, firms detailing their adaptation efforts saw stock price declines equally as large as firms with no disclosure at all after disasters.