Climate change isn't just an environmental threat, it's a financial one too.

A new study by researchers at the University of Auckland Business School sheds light on how climate change can negatively impact a company's value.

Professor Henk Berkman and his co-authors developed a unique method to assess a company's vulnerability to climate risks by analysing their annual reports.

This analysis takes into account how a company reports on potential climate change impacts, such as disruptions to sales or physical damage from extreme weather events.

"Companies are increasingly disclosing their exposure to climate change," explains Professor Berkman.

"Our research converts this information into a score that reflects a company's vulnerability."

This score, according to Berkman, reveals a clear connection between climate risk and company value.

Henk Berkman is Professor of Fnance at the University of Auckland Business School.

"Companies with high climate risk see their stock prices fluctuate more dramatically in response to climate-related news events," he says.

"For instance, a negative report from the Intergovernmental Panel on Climate Change or a major flooding event can significantly impact their value compared to companies less exposed to climate risks."

The study suggests that the financial market views climate risk as a significant factor, penalising companies with higher vulnerability.

Investor Tool Unveiled

This research offers valuable insights for investors navigating the financial landscape in a changing climate.

The researchers' tool allows investors to rank companies based on their climate risk exposure.

"This information helps investors identify companies most sensitive to climate change," says Professor Berkman.

"Investors can then assess those companies' risk management strategies, such as cash reserves or diversification efforts, to make informed decisions."

By demonstrating the financial implications of climate risk, the study aims to encourage further development of measures and standards to help investors better understand climate risks and their impact on company value.

Professor Berkman concludes, "Our findings highlight the connection between climate risk exposure and market value.

Companies with greater vulnerability face financial penalties, demonstrating that the market recognises climate change as a serious financial threat."