From Text to Value: Measuring and Pricing Firm Climate Risk Exposure

Does mentioning climate risk in corporate reports cost market value to firms?

Stefano Dell'Atti, Matteo Foglia, and Grazia Onorato build a measure of how central climate risk is in corporate narratives, and test how investors price it in "From Text to Value: Measuring and Pricing Firm Climate Risk Exposure".

Their climate risk exposure index scores the prevalence, diversity, and connectivity of terms in four clusters mentioned in the EU regulation: transition risk, physical risk, emissions, and pollution.

They study 34 EURO STOXX 50 nonfinancial companies’ sustainability and climate reports from 2015 to 2024. Their main conclusions include:

• The index captures how central climate themes are within the narrative, not just how often they appear, and the discount holds in dynamic panel estimates that address reverse causality.
• Firms placing climate risk at the centre of their narrative trade at lower valuations the following year, with investors pricing compliance costs, stranded assets, and future liabilities.
• A positive, forward-looking tone partially offsets the discount by steering attention towards preparedness, yet the penalty remains even under optimistic framing.
• Firms whose disclosure ranks at least three deciles above their environmental pillar score (a pattern consistent with greenwashing) carry a sizeable valuation discount.
• For these high-gap firms, however, additional disclosure is associated with higher value, as investors appear to read it as a commitment to close the gap rather than as cheap talk.
• Companies that were already high disclosers before the SFDR took effect in March 2021 saw a smaller repricing than late movers.

This study extends the earlier finding in this series that firm-level climate exposure in written reports is priced like that in earnings calls, and the credibility discount applied to disclosers is neither fixed nor irreversible.

The sample however covers only 34 blue-chip nonfinancial firms, and a dictionary-based index cannot capture scenario analysis quality or climate-linked executive pay.

Results may differ for smaller or unlisted companies, so evidence from the staggered rollout of the CSRD across firm sizes would sharpen causal identification.