Measuring weather exposure with annual reports

Venky Nagar () and Jordan Schoenfeld ()
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Venky Nagar: University of Michigan
Jordan Schoenfeld: University of Utah

Review of Accounting Studies, 2024, vol. 29, issue 1, No 1, 32 pages

Abstract: Abstract The FASB and IFRS Foundation’s International Sustainability Standards Board have called for measuring individual firms’ exposure to weather, a fundamentally amorphous concept, as a first step toward quantifying the impact of environmental factors on financial reporting. This study builds a large-scale measure of individual firm exposure to weather using linguistic analysis of annual reports. Preliminary analyses suggest that weather is a determinant of our measure: e.g., the measure increases significantly after the firm gets hit by a severe storm. Despite being constructed from largely backward-looking mandated reports, our measure is forward looking in that it can predict variation in returns around future extreme weather events. Exposure to our measure is also priced as a risk factor, further establishing its forward-looking nature systematically in the cross-section. Our measure appears to reasonably capture a firm’s business exposure to weather, thus showcasing the power of accounting to measure the economic impact of environmental, social, and governance (ESG) factors.

Keywords: Annual reports; Asset pricing; Climate; CSR; ESG; Weather (search for similar items in EconPapers)
JEL-codes: G12 G14 O13 Q54 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11142-022-09711-2

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