Pricing Climate Change Exposure

We estimate the risk premium for firm-level climate change exposure from 2003 to 2019. Exposure is constructed from discussions of climate-related risks and opportunities in earnings calls. When extracted from realized returns, the unconditional risk premium is zero. This insignificant overall effect masks risk premium increases during the sample period, but with a slump in the financial crisis. Forward-looking proxies deliver an unconditionally positive expected risk premium, with subtle differences in the time series depending on the treatment of tail risks and opportunities. When the underlying model uses variance as the sufficient risk statistic, the premium gradually increases over time. When the model considers tails, the premium declines after 2015, because investors now link climate change exposure to higher opportunities and lower crash risk. This finding arises as the priced part of the risk premium primarily originates from climate-related opportunity shocks rather than downside physical or regulatory shocks.