Impact of Climate Change on Firm Earnings

This study examines the impact of climate change on firm earnings, and how well managers and analysts anticipate the impact. Exploiting temperature variation around corporate headquarters, we find that firms’ earnings, on average, are negatively impacted by an unusually warm climate. In economic terms, a 1°C increase in temperature is associated with a $2 million decrease in earnings for a median-sized firm. The effect of temperature not only reduces sales, but also increases expenses, including purchases from suppliers and factory production costs. In cross-sectional analyses, we find a less negative impact for firms with greater diversification and for those in industries with higher lobbying intensity. Industry analysis reveals that most industries’ earnings are negatively impacted at the aggregate level, however, about one-third of firms within each industry are positively impacted. At the firm level, managers and analysts tend to underestimate the negative impact of a warmer climate on earnings. Further, managers’ underestimation is especially strong in states where the legitimacy of climate change is questioned.