By Caroline Flammer, Associate Professor, Boston University


Caroline Flammer

Investors increasingly incorporate the climate risk exposure of their portfolio companies in their decision making. In fact—and as reflected in the record number of climate-related shareholder proposals submitted to US companies in 2019—shareholders progressively pressure their portfolio companies to disclose and manage their exposure to climate change risks (Wall Street Journal, 2019). Yet, it is unclear whether such shareholder pressure is effective—that is, are shareholders successful in inducing their portfolio companies to disclose their exposure to climate change risks? And if so, which shareholders are most successful? And what are the value implications for companies disclosing this information? In a recent study, we shed light on these questions.

Let me first provide some background. One reason behind the surge in climate-related shareholder activism is the growing recognition of increased costs and risks associated with climate change (e.g., New York Times, 2018). Indeed, companies across the world are increasingly bracing for the direct and indirect impacts of climate change on their bottom lines, as extreme weather conditions represent major risks that can hurt the firms’ operations and supply chains (e.g., New York Times, 2019).

For example, flooding and fierce storms disrupted US drug maker Eli Lilly’s manufacturing facilities in Puerto Rico after Hurricane Maria in 2017. Similarly, Hitachi Ltd., a Japanese manufacturer, reports that increased rainfall and flooding in Southeast Asia has the potential to disrupt its supply chain. Banco Santander Brasil, a large Brazilian bank, expects that increasingly severe droughts in the region might hurt the ability of borrowers to repay loans. California’s largest electric utility Pacific Gas and Electric (PG&E) faces increased wildfire risk, partly driven by global warming. The company was held liable (facing at least US$30 billion in fire liabilities) for the 2018 disastrous California wildfire after its power lines sparked what became California’s deadliest wildfire to date, and filed for bankruptcy protection in early 2019 (Forbes, 2019). Google’s parent company, Alphabet Inc., expects that rising temperatures could increase the cost of cooling its energy-intensive data centers. All these examples feature direct impacts of climate change.

On top of such direct impacts, climate change may also hurt companies indirectly. For example, a significant financial risk energy companies face pertains to so-called “stranded assets”—coal, oil, and gas reserves that companies list as part of their assets, but might in fact be worthless, since those reserves may never be drilled and instead be left stranded by stricter regulations to curb climate change (e.g., Financial Times, 2015; Fortune, 2015). Such assets include buildings in high-risk flood zones, power plants that may need to shut down, etc. (New York Times, 2019). As these examples illustrate, a firm’s exposure to climate change risks is about the threat of damage, injury, liability, loss, or any other negative impact on the company that is caused by a future climate-related event. In particular, climate change risks can entail physical risks (e.g., flooding, fierce storms, drought, extreme temperatures), regulatory risks arising from current and expected governmental policies related to climate change (e.g., energy efficiency standards, carbon trading schemes), and other climate-related risks (e.g., reputation, changing consumer behaviour, increasing humanitarian demands, etc.). Importantly, climate change is a global phenomenon that affects firms across industries and regions.

Despite the growing importance of climate change risks, little is known about companies’ exposure to climate change risks and what strategic actions they take to manage and mitigate these risks. A key reason behind this lack of information is the fact that, in many countries (including the US), the disclosure of non-financial information is not mandated by law. For example, the US Securities and Exchange Commission (SEC) currently only recommends that companies disclose their climate change risks, but does not mandate such disclosure nor does it offer any guidance in terms of what information should be provided. As a result, companies often provide only limited (if any) pertinent information.

Given the lack of mandatory disclosure requirements, it is not surprising that investors are increasingly vocal in demanding companies’ disclosure of climate risks. In our study, we examine whether, in the absence of public governance, private governance—in the form of shareholder activism—can elicit greater disclosure of firms’ exposure to climate change risks along with information on how firms are managing those risks.

Our results indicate that environmental shareholder activism at US companies induces managers to voluntarily disclose climate change risks. Specifically, we find that, on average, the extent of climate risk disclosure increases by around 4.6% per proposal. Moreover, environmental shareholder activism is particularly effective if it is initiated by institutional investors (that is, investors who have more “power”), and even more so if it is initiated by long-term institutional investors (that is, investors whose request has more “legitimacy”). Finally, we find that companies that disclose climate risk information following environmental shareholder activism achieve a higher valuation post disclosure. This suggests that shareholders value the voluntary disclosure of climate risk information. Overall, our findings indicate that active shareholders can elicit greater climate risk disclosure, thereby improving the governance of their portfolio companies.

Overall, our findings indicate that active shareholders can elicit greater climate risk disclosure, thereby improving the governance of their portfolio companies

The findings of our study have important implications for practice as they highlight the ability of investors to elicit greater corporate transparency with respect to firms’ climate change risks and thereby contribute to their portfolio companies’ governance. In the absence of mandatory disclosure requirements imposed by the government, this greater ability also implies a greater responsibility of investors (especially of long-term institutional investors) to be active owners and engage with the management to elicit the disclosure of climate risks.

On this note, we caution that, while our results indicate that shareholder activism is effective in eliciting the disclosure of climate change risks, it need not substitute for mandatory disclosure requirements imposed by the government. Indeed, the latter is likely more effective in improving the quantity and quality of disclosure; fostering the standardisation of disclosure (thereby facilitating investors’ assessments of their portfolio companies); and ultimately achieving progress in the fight against climate change. As such, long-term institutional investors may want to both pursue shareholder activism and engage with government to impose mandatory climate change risk disclosure.


This article summarises the key findings of a research project, Shareholder Activism and Firms’ Voluntary Disclosure of Climate Change Risks, that I have co-authored with Michael Toffel and Kala Viswanathan. 


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