Climate change exposure in uncertain times: A text-based approach

Taking advantage of an innovative text-based approach to assess firm-specific climate change exposure, we examine how economic policy uncertainty (EPU) influences firm-level climate change vulnerability. Based on a large sample of U.S. firms with over 60,000 observations spanning almost two decades, our analysis shows that greater EPU raises climate change exposure significantly. Specifically, a rise in EPU by one standard deviation results in an increase in climate change exposure by 2.8 %–4.9 %. Our findings are consistent with the notion that, during uncertain times firms have more difficulty formulating plans to cope with climate change, ultimately resulting in more serious climate change vulnerability. Further analysis validates the results, i.e., propensity score matching, entropy balancing, an instrumental-variable analysis, and using Oster's (2019) approach to assess coefficient stability. Furthermore, the effect of EPU on climate change exposure is more pronounced for firms paying larger dividends but is weaker for firms investing more in R&D. In addition, we show that the effects of EPU on various dimensions of climate change exposure can differ. Finally, we document that greater EPU makes companies more vulnerable to more diverse areas of climate change exposure.