Climate risk disclosures: Why more information isn’t always better for investors

By Professor Simone Varotto, Henley Business School

As we’ve witnessed in recent weeks with the devastating LA wildfires, climate change continues to accelerate at pace. The natural disasters it brings with it pose significant physical risks to businesses worldwide, meaning that investors are increasingly scrutinising how companies prepare for and adapt accordingly to them.

Yet, when it comes to protecting shareholder value, simply acknowledging climate risks may be more effective than detailed adaptation strategies.

At Henley Business School, we carried out a study that revealed a counterintuitive truth about corporate climate disclosures: more disclosure doesn’t necessarily translate to better market performance during climate-related emergencies.

We analysed the financial reports of UK-listed companies from 1996-2018 and found a surprising pattern in how markets respond to different types of climate disclosures after natural disasters strike.

Companies that simply disclosed their exposure to climate risks saw smaller stock price declines following disasters compared to their non-disclosing peers. Yet, firms that went further by detailing their climate adaptation strategies experienced stock price drops just as severe as companies that made no disclosures at all.

This counterintuitive finding raises important questions. Why would markets seemingly punish companies for being more transparent about their climate preparedness?

I believe there are a couple of factors that might explain this. First, businesses might be uncertain about how best to communicate adaptation plans, worrying that investors may misinterpret the disclosures. The current lack of standardisation in how companies report adaptation strategies creates ambiguity that may leave investors sceptical.

Second, investors might view generic adaptation disclosures as superficial commitments – ‘cheap talk’ – rather than concrete action plans. Where we are more aware of greenwashing these days, the market appears to demand more than just stated intentions.

The implications for the investment community are significant. While transparency around climate risk exposure clearly helps reduce market uncertainty and protect firm value, the current approach to adaptation disclosure needs a rethink. The situation has led to a new trend known as ‘greenhushing’ – where companies deliberately under-report or withhold information, fearing negative market reactions.

This creates a concerning cycle. With fewer companies discussing their adaptation measures, the incentive to implement them diminishes, which could potentially leave businesses more vulnerable to climate-related disruptions in the future.

Yet as climate-related disasters become more frequent and severe, the finance community’s ability to accurately price climate risks and adaptation efforts will become increasingly important.

I believe that mandatory reporting requirements combined with standardised frameworks are required, as they will allow for meaningful comparison of adaptation strategies across organisations and sectors. Without clear guidelines and metrics, even well-intentioned disclosure efforts may fail to build investor confidence.

In the meantime, corporate leaders are faced with a delicate balancing act: how to maintain climate risk transparency while communicating adaptation strategies in ways that build investor confidence rather than erode it.

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