Financial analysts’ coverage, forecast accuracy, and climate change vulnerability

Abstract

The effects of climate change are real. The understanding of how these effects manifest in business operations is still nascent, but even more so, how they affect users of company information. This study sought to determine whether and how climate change vulnerability relates to an important business stakeholder, the financial analyst. We hypothesize that climate change vulnerabilities reduce both analysts’ following and analysts’ forecast accuracy. Using data from the Center for Research in Security Prices (CRSP), Compustat, Audit Analytics, Institutional Shareholder Services (ISS), and London Stock Exchange Group (LSEG), we construct a sample of 3,754 firm-year observations comprising 1,269 unique firms for the years 2019–2022. Our proxy for climate change vulnerability is the environmental, social, and governance (ESG) controversies score. We estimate cross-sectional regression models to test our hypotheses. We find support for our hypotheses. Also, we find that firms with high climate change vulnerability have significantly lower analyst coverage than those with low vulnerability. We also find that financial analyst forecasts are significantly less accurate for firms with higher vulnerability. However, this effect is only observable in industries classified as more exposed to the effects of climate change. We recognize the noisy nature of our proxy for vulnerability to climate change. Cognizant of this, we conduct further analysis to allay concerns of bias in our findings. We make important contributions to the existing literature by not only showing that ESG controversies score is an appropriate proxy for climate change vulnerability but also by adducing empirical evidence that climate change vulnerability affects how analysts react to and use company financial information. We discuss the significance and limitations of our results and make recommendations for further research.