Carbon Disclosure, Contextual Factors, and Information Asymmetry: The Case of Physical Risk Reporting

Abstract

The paper focusses on the reporting of climate change-related physical risks. Drawing on data from the CDP questionnaire for 717 European companies over three years (2011–2013) we find that information asymmetry is generally smaller when firms report about their physical risks. Furthermore, we find that reporting of a higher exposure to physical risks is associated with lower information asymmetry for firms falling under the regulation of the EU Emissions Trading Scheme, whereas for other firms the direction of the relationship reverses. We can rule out that our results are driven by other climate change-related risk disclosures and by disclosures about opportunities arising from climate change. This study is not only relevant because it attests the materiality of climate change-related physical risks. Moreover, we show how a contextual factor – in this study: whether a company falls under climate change-related regulation – moderates the direction of the relationship between reported information and information asymmetry.

Keywords:

• Climate change
• Voluntary disclosure
• Physical risks
• Information asymmetry

JEL:

• C33
• M14
• M41

Acknowledgements

We would like to thank the Associate Editor Michel Magnan and two anonymous reviewers for their valuable comments and guidance. Furthermore, we would like to thank the participants at the EAA conference 2016 in Maastricht, the CSEAR conference 2016 in St. Andrews, and the FRBC conference 2015 in Bristol; the participants at research workshops at the University of Strathclyde in Glasgow, the Radboud University in Nijmegen, and the University of Hamburg; as well as Lucia Bellora-Bienengräber, Maik Hamann, Joern Hoppmann, and Christian Ott for their valuable comments. We would also like to thank the Cluster of Excellence ‘Integrated Climate System Analysis and Prediction’ (CliSAP) at the University of Hamburg for its financial support.

ORCID

Frank Schiemann http://orcid.org/0000-0002-7817-7792

Notes

1 The CDP is a non-profit organization that, on behalf of several institutional investors, collects company-level data related to climate change, as well as other information, on a self-reported voluntary basis.

2 This might not be the case for more vulnerable industries, such as insurance or agriculture, in which exposure is more similar across companies. We address this concern in a robustness analysis in Section 7.2.

3 As an alternative, we estimated regressions based on trading volume and price volatility as the dependent variable and found qualitatively similar results, but with generally lower significance levels.

4 Note that we do not include industry dummy variables in Equation (2). The reason is that some models do not converge when industry dummy variables are included in the Information Asymmetry Model. (Matsumura et al., 2014) encountered a similar problem. We tested the robustness of results by alternatively estimating the Information Asymmetry Model with industry dummy variables for those models that do converge and found only very small differences in coefficient sizes, but no changes in signs and significance levels. Therefore, results seem to be robust to the inclusion of industry dummy variables.

5 The amount of category ‘unknown’ is small but still considerable. With an average of 3.56 physical risks reported by a firm, we code an average of 10.68 distinct answers (3.56 * 3 categories) and find that an average of 1.34 distinct answers provided are ‘unknown.’

Alternatively, we code ‘unknown’ as the average number within the coding scheme of the corresponding category (e.g. for Occurrence the average value is 4.5). The correlation between our basic measure and the alternative measure is very high at 0.892 (significant at p < .01). The results basically remain the same; in particular, significances of the variables of interest do not change materially.

6 Alternatively, we apply the interaction Non-ETS * Physical Risk Reporting as well as the variable Non-ETS in the regression (unreported result). Neither of them is significant. This indicates no significant difference between ETS and non-ETS companies regarding the association between Physical Risk Reporting and Information Asymmetry.

7 In unreported results, for the corresponding regressions we find significant coefficients for the variables Regulatory Risk Reporting and Other Risk Reporting. However, the interpretation can be extended only to the reporting of risk related to climate change in general, because the intersection between firm-year observations that report on all three risks is very large.

Additional information

Funding

This work was supported by the Cluster of Excellence “Integrated Climate System Analysis and Prediction” (CliSAP) at the University of Hamburg.