The Transmission of Climate Hazard Exposure to Equity Risk: Evidence from Real Estate Firms

Abstract Climate-related hazard exposure is hypothesized to increase systematic risk (market beta) for firms reliant on physical assets. Using data on the asset locations of 141 Real Estate Investment Trusts (REITs) from 2002 to 2021, along with expected annual loss ratios for eleven types of weather hazards at the ZIP code level, this paper finds that exposure to such hazards increases real estate firms’ market beta by elevating debt costs, earnings volatility, and capital expenditures associated with weather-related disasters. Climate risk is thus priced into equity returns via elevated firm-level beta. To mitigate such risks, firms and investors may consider increasing sustainable assets, enhancing ESG performance, monitoring public sentiment, and leveraging transparent climate reporting.