Excerpt
April 18, 2025, Paper: "We examine whether information in the 10-K Business Description section on f irms’ development and deployment of climate solution products and services can be used to assess climate transition risk through its implications for asset prices and firm performance. Using large language models to extract this information, we f ind that firms more engaged in climate solutions exhibit lower stock returns, higher valuation multiples, and more positive (negative) stock price reactions to climate related events signaling increased (decreased) future demand for climate solutions. We then document that these firms also exhibit higher future profitability when regulatory uncertainty is high, climate concerns unexpectedly increase, and a larger share of sales is in states with climate plans and support for climate action. Overall, our results appear consistent with the hedging hypothesis (P´ astor, Stambaugh, & Taylor, 2021, 2022): that firms with high exposure to climate solutions—identified via existing mandated disclosures—can hedge investors against climate transition risks."