In a recent paper, we offer fresh insights into how climate-related communication can materially influence corporate finance. We find that firms whose earnings calls contain positive climate change sentiments (effectively communicating firms’ contribution to protecting the environment) tend to have lower implied costs of equity capital – particularly when they operate in politically conservative or climate-vulnerable regions.
While many studies have examined how environmental metrics like emissions data or ESG ratings affect asset prices, we examined the role of firm-level climate sentiment (developed by Sautner et al., 2023) obtained using textual analysis from earnings call transcripts from 2002 to 2020. This measure captures how management teams, analysts, investors, and other market participants talk about climate risks and opportunities in real time – information that’s often more forward-looking than static ESG disclosures.
Our results show that a one standard deviation increase in positive climate sentiment is associated with a 7 basis point reduction in the firm’s implied cost of equity capital. That may sound small, but it represents a 1.3 percent decrease relative to the median firm in our sample, and in the low interest-rate environment during which our study was conducted, the difference is meaningful. This relationship held across various estimation methods and remained robust even after controlling for traditional financial and ESG factors.
We also find that the effects of climate sentiment vary across regions and political environments. Firms headquartered in politically conservative states, high-carbon-emission areas, or regions prone to climate-related disasters saw a stronger reduction in their cost of equity when they expressed positive climate sentiment. We refer to this as the “boomerang” effect: In areas where climate skepticism or transition risk is higher, a firm’s clear articulation of climate goals may serve as a particularly strong signal of its long-term orientation and resilience. Investors appear to reward these signals with more favorable terms.
We also found that climate sentiment has more explanatory power than traditional “E” scores in ESG ratings. Even after controlling for those scores, the sentiment we captured remained a significant predictor of the cost of capital. This suggests that markets are paying attention to how firms communicate about climate change – not just what they disclose in ESG reports, but how seriously and positively they frame the issue in real-time interactions with analysts and shareholders.
We see important implications in these findings. For corporate leaders, the message is clear: Climate-related communication – especially in earnings calls – can influence how investors assess risk and return. For asset managers and analysts, there is value in listening closely to the tone and substance of corporate climate discussions, beyond the numbers in ESG databases. And for policymakers, particularly in regions less aligned with national goals of lowering greenhouse gas emissions and protecting the environment, our results indicate that market participants may already be pricing in transition risks, regardless of local policy posture.
REFERENCES
Bardos K. S., D. R. Mishra and H. Y. Somé, 2025 “Firm-level climate sentiments, climate politics and implied cost of equity capital”, Journal of Corporate Finance, forthcoming https://doi.org/10.1016/j.jcorpfin.2025.102846
Sautner Z., L. van Lent, G. Vilkov, and R. Zhang, 2023. Firm-level climate change exposure. Journal of Finance 78, 1449-1498.
This post comes to us from professors Katsiaryna Bardos at Fairfield University’s Dolan School of Business, Dev Mishra at the University of Saskatchewan’s Edwards School of Business, and Hyacinthe Somé at the Université de Sherbrooke. It is based on their paper, “Firm-Level Climate Sentiments, Climate Politics and Implied Cost of Equity Capital,” available here.