UNIST, "Executive Climate Change Awareness Influences Financial Markets"

[Asia Economy Yeongnam Reporting Headquarters Reporter Hwang Dooyul] A research team at UNIST announced research results showing that when corporate executives take an active stance on climate change and carbon neutrality, the risk of stock price crashes decreases.

Risks related to climate change and carbon neutrality have become a key factor in corporate decision-making. Accordingly, recently, Professor Song Changgeun's team at the UNIST Graduate School of Carbon Neutrality conducted a study titled “The Impact of Corporate Executives' Perceptions of Climate Change on Financial Markets.”

The study found that when corporate executives take an active stance on climate change and carbon neutrality, information asymmetry between companies and the market is reduced, resulting in a decreased risk of stock price crashes.

Information asymmetry refers to the phenomenon where there is a difference in the information held by companies and investors in transactions conducted in financial markets. Despite investors' high interest in companies' perceptions of climate change, in the absence of quantitative indicators, information asymmetry related to climate change intensifies.

Dr. Ha-il Jeong (from the left) and Professor Chang-geun Song from the Carbon Neutral Graduate School at UNIST, who conducted this study.

First, the research team judged that it is limited to interpret companies' intentions and perspectives on climate change and carbon neutrality solely from the figures in business reports composed of accounting variables, so they used an indicator calculated by a machine learning model analyzing mentions of climate change in executives' earnings announcement statements for the study.

The machine learning model used for calculating the indicator was trained on words related to climate change, and when applied to companies' earnings announcement statements, it is an algorithm that calculates the proportion of climate change-related content in the respective statements.

Using the calculated indicator values, the research team analyzed the impact of their changes on the actual financial market, especially on information asymmetry between companies and the market, confirming that the more actively executives respond to climate change, the more information asymmetry decreases.

This study shows that financial markets have great interest in companies' responses and executives' perspectives on climate change and carbon neutrality, and that reducing information asymmetry through active corporate responses and information disclosure is necessary.

Dr. Jung Hail, the first author, said, “The unprecedented climate change crisis affects not only our health but also corporate management and financial markets,” adding, “As corporate decision-making on climate change is receiving higher attention than ever, I hope this study will help in establishing corporate management strategies.”

This study was published in January 2023 in the international academic journal in the field of finance, Finance Research Letters.

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