Climate Risk Disclosure and Risk Sharing in Financial Markets

In this paper, I model how climate risk disclosure impacts climate risk sharing among investors. I show that this disclosure can improve risk sharing by helping investors identify stocks that effectively hedge climate risk, and I analyze the disclosure’s impact on investors’ equilibrium portfolio choices. I then study firms’ voluntary disclosure incentives and analyze when disclosure mandates enhance risk sharing. Finally, I demonstrate that, by facilitating risk sharing, climate risk disclosure reduces the climate risk premium among stocks held by climate-focused investors. Hence, disclosure can lower the valuations of firms with low climate exposures and the overall market. (JEL: D82, D84, G12, G14)