Faralli (2023)

Faralli, Matilde. “What Drives Beliefs about Climate Risks? Evidence from Financial Analysts.” Working paper (Imperial College London), October 2023.

lk notes from Matilde Faralli presentation at PRI in Person Academic Network Conference (Tokyo), 2023.

Total cost of natural disasters in U.S. 1980-2022 was $2.2 trillion.

In Japan, 40% of the $10 billion damage from Typhoon Hagibis was down to climate change, per Imperial College research.

Market participants react to climate-related events. After heat waves:

• Investors sell high carbon stocks

• Households more likely to change pension choices

• etc.

I built a dataset w/ geo-localized analysts and natural disasters in the U.S. I compared analysts close to the weather shock to those further away.

Reviewed I/B/E/S forecasts, cross referenced w/ analysts’ location, climate events, and firm information (Compustat).

After a weather shock, analysts become more pessimistic and more accurate. Main takeaway - Weather events only improve the forecasting ability of skilled analysts.

• High performance analysts become more pessimistic for firms with high physical risk.

• Low performance analysts become more pessimistic for all firms, irrespective of climate risks.

Darwin Choi (discussant) comments -

Why do these stocks go down? Competing explanations.

• Investor cash flow forecasts go down.

• Investor preference for green goes up.

This paper deals with this by focusing on analysts and their forecast of future cash flows. This really differentiates from prior literature.

Would disagree about use of ‘information’ – “these disasters do not contain ‘information’ about the firm… I think of these as personal experiences, or wake-up calls. But we know analysts generally underestimate impact of climate risk.”

The paper shows that high-performing analysts use these events correctly.