The impact of climate change and carbon policy on company earnings

Climate change and climate policy have started to reconfigure global financial systems. However, financial institutions need guidance on how to incorporate the future impacts of climate change and climate policy into the investment decision-making process. Here, using European companies and installations as a case study, we develop a framework to evaluate the impact of climate change and climate policy on company earnings. We combine novel econometric and carbon pricing models to build a framework for an asset-level, climate-adjusted valuation of company earnings. In the European context, we see disparate impacts between and within sectors, with carbon pricing impacts largest in the heavy emitting sectors, equivalent to -2% of earnings at the mean, whereas the physical impacts of climate change are more geographically segregated, with a median impact of -14%, discounted 20 years into the future. We intend for the structure of this study to inform more impactful integration of climate risks into financial risk management processes.