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for non-disclosing firms. Our study further contributes to the literature by examining the risk relevance of disclosing CCR in 10-K filings
, incremental to voluntary CCR disclosures to CDP .
Our findings lend support to the concerns that managers’ failure to disclose CCR imposes additional risk on firms, but only in industries where users judge CCR as material. Our results
also extend those of Khan et al. 2016, who find a positive association between sustainability investments and future abnormal stock returns, but only in firms that have strong ratings on
material sustainability issues. Finally, our study sheds light on the SEC’s recent call for public comment on whether
certain Regulation S-K disclosure requirements need to be updated to better serve the needs of investors and registrants SEC 2016. The materiality principle is intended to balance investors’
need for information to make informed decisions, without being burdened with excessive information, against the cost to registrants of providing information. Our findings provide
evidence that disclosing CCR is associated with lower COE, but only when users judge CCR to be material.
The remainder of this paper is organized as follows. The next section discusses institutional background on CCR, while section III reviews the research literature and develops
our hypotheses. Sections IV and V describe our research design and provide the results of hypotheses tests, respectively. The last section briefly summarizes the findings and discusses the
study’s limitations and implications for research and practice.
II. INSTITUTIONAL BACKGROUND ON CLIMATE-CHANGE RISK
According to Item 503c of Regulation S-K, a registration statement filed with the SEC must contain a discussion of the most significant factors that make the offering speculative or
risky SEC 2004. In addition, Form 10-K filings must also include this information, and 10-Q
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filings must set forth any material changes to the risk factors described in the annual filings. The 2010 SEC interpretive guidance clarifies Regulation S-K and specifies that companies are
expected to disclose CCR that can materially affect registrants’ business operations and financial performance SEC 2010. Climate-related risks include those related to the transition to a lower-
carbon economy e.g., policy, legal, technology, reputation, and market changes to address mitigation and adaptation requirements related to climate change; and risks related to the
physical impacts of climate change e.g., due to floods, rising sea levels, and water availability, with direct damage to assets and indirect impacts from supply chain disruption SEC 2010.
Despite the growing importance of CCR to investors’ understanding of a company’s performance Deloitte Touche LLP 2016; Gelles 2016; UBS 2012,
a recent study that examines CCR disclosures of the 20 largest publicly traded U.S. companies in their 2012 through
2014 Form 10-K filings finds that most companies reported little or no information on CCR InfluenceMap 2015. For example, GE did not disclose in its 10-K filings the risk that climate
change poses to its supply chain e.g., water shortages, severe weather patterns, despite having more than 130 manufacturing facilities in 40 countries InfluenceMap 2015, 2.
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Further, Boeing failed to mention CCR in its 10-K filings, even though its 2014 annual report stated that, “costs
incurred to ensure continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows”
Olson and Viswanatha 2016. In a high-profile case analogous to the ExxonMobil case, Peabody Energy privately
projected a devaluation of its coal reserves as a result of passage of regulations to curb emissions from the combustion of coal. However, the company withheld this information from investors,
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Many firms disclose CCR outside of documents filed with the SEC through voluntary disclosure initiatives or in response to non-SEC regulatory requirements Walter 2010. In addition to CDP, other voluntary channels include
corporate sustainability reports through the Global Reporting Initiative GRI, corporate websites, and social media.
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choosing instead to state in its 2011 through 2014 10-K filings that “it was not possible to reasonably predict the impact that any such laws or regulations may have on [Peabody’s] results
of operations, financial condition or cash flows” New York Attorney General 2015. Although Peabody eventually agreed to fully disclose in its 10-K filings the potential impact of climate
change regulation on the value of its coal reserves, investors suffered millions of dollars in losses as the company’s shares dropped from 1,000 in 2011 to around 4 four years later, and it filed
for bankruptcy in April 2016.
III. THEORY AND HYPOTHESES DEVELOPMENT
