Greenhushing: Investor reactions to climate disclosures

As climate change accelerates, it brings with it more natural disasters like floods, hurricanes, wildfires and drought, all of which pose significant physical risks to businesses across the globe. As such, investors are increasingly focused on how companies disclose their exposure to climate risk and their strategies for adaptation.

Climate adaptation disclosure involves businesses reporting their measures to adapt to the physical risks posed by climate change. Such disclosures are intended to demonstrate to investors how well-prepared companies are for handling climate-related disruptions. You’d expect these disclosures to lead to substantial benefits in preserving firm value and raising investor confidence, but you’d be wrong.

To understand how different types of climate-related disclosure affect a company's stock price performance in the wake of natural disaster events that hit a firm's location, we carried out a study at Henley Business School analysing the financial reports of UK publicly listed firms from 1996-2018.

Using text analysis techniques, we categorised them into three groups:

• Those not disclosing any information about physical climate risks.
• Those disclosing exposure to physical climate risks.
• Those disclosing exposure to risks as well as details on climate adaptation strategies.

Our findings revealed a surprising dichotomy.

Firms that disclosed their exposure to climate risks saw lower declines in stock price after a disaster compared to firms with no disclosure. This suggests that such disclosures help mitigate investor uncertainty and protect company value.

By contrast, disclosing climate adaptation strategies did not provide the same beneficial effect on stock prices. In fact, firms detailing their adaptation efforts saw stock price declines equally as large as firms with no disclosure at all after disasters.

Why would investors respond so differently?

Here are my suggestions for what could be driving this:

• Businesses might be uncertain about how best to communicate adaptation plans, worrying that investors may misinterpret the disclosures. There is likely inadequate standardisation and specificity around how companies report their adaptation strategies, fuelling ambiguity.
• Investors may view generic adaptation disclosures as “cheap talk” without real commitments and concrete actions behind them.
• Investors may interpret the disclosures as vulnerabilities, penalising a company when in fact the company is taking positive action to prepare for climate change.

We found no evidence that investors were simply dismissing adaptation disclosures due to concerns about corporate greenwashing - companies reporting on adaptation did not appear more prone to sustainability compliance violations.

What are the implications for climate change action?

It’s worth saying that our study underscores the value of being transparent when disclosing physical climate risk exposure. It can reduce investor uncertainty and protect firm value.

However, it’s clear there are challenges when it comes to providing decision-useful information on climate adaptation plans. There appears to be ambiguity or a credibility gap preventing investors from positively valuing these disclosures.

This is resulting in widespread greenhushing - when firms deliberately downplay or refrain from disclosing climate or sustainability initiatives in their annual reports. Unfortunately, greenhushing is contagious, and by not talking about these adaptation measures, the incentive is to not act at all.

This is extremely concerning because greenhushing is stifling climate action at a time when we need it most. Disclosures should build investor confidence and reduce uncertainty, ultimately supporting more resilient financial markets in the face of climate change.

I believe the solution is mandatory and standardised physical risk disclosures of climate adaptation practices, working towards creating a standardised framework for climate adaption reporting. Adaptation strategy disclosure will then become the norm and will quickly be shared by firms. Best practice will spread quickly which will ultimately make companies, economies and society more ready and resilient when facing the increasingly inevitable climate disasters of the future.