Are climate scenario analysis disclosures valued by investors?

Abstract

Scenario analysis is a well-established management tool for developing and executing organizational strategy. While stress testing (a form of scenario analysis) has been used for policy-making and benchmarking in the banking sector, climate-related scenario analysis is a more recent development. Emergent accounting standards require firms to perform and report on climate scenario analyses. This paper examines whether information about firms’ climate scenarios is valued by financial markets. Relying on voluntary disclosures from US publicly traded firms in the CDP database from 2018 to 2022, we find that firms conducting scenario analyses have higher market valuations, with less positive valuations for firms that incorporate insights from qualitative (not quantitative) scenarios into their strategy. The findings highlight the importance of using scenario analysis to inform strategy and the need for clearer guidance on disclosure practices.