Climate challengesForging a New Field: Finance Sustainability

Climate economists have long focused on governmental policies, economic welfare and the economy as a whole. Financial economists – who study corporate bottom lines – had no scholarly forum for examining the intersection of finance and climate change – until now.

In a special climate change issue of the Review of Financial Studies, nine new research papers – including two from Cornell – have staked new territory for scholarly study: finance sustainability.

“There are many finance questions that pertain to climate change, and people in the financial world want answers,” said Andrew Karolyi, the Harold Bierman Jr. Distinguished Professor of Management, and the Cornell SC Johnson College of Business’ deputy dean and dean of academic affairs. Karolyi was one of three editors who spearheaded the special edition, published in March.

The project was led by Karolyi; Harrison Hong, professor of financial economics at Columbia University; and José A. Scheinkman, professor of economics at Columbia University. They spent two years searching for and receiving submissions, then combed through 106 papers submitted by 208 researchers.

“We wanted to pin down academic research for climate change as it relates to financial risks, pricing and modeling,” Karolyi said.

Justin Murfin, associate professor at the Dyson School, co-authored one of the two Cornell papers. Murfin and collaborator Matthew Spiegel from Yale University found that current coastal real estate prices in the United States do not reflect anticipated sea level rise.

They scoured real estate websites, weighted home sales and studied county tax records all across the U.S.

“We wanted to know if the risk of a rising sea level had begun getting priced into the home sales or not,” he said. “If people were pricing the risk of climate change, it would have certainly shown up in the data. We just didn’t find any evidence.”

Cornell says that in their work, Murfin and Spiegel disentangled the value of homes that sit at higher elevations from factors pertaining to sea level rise. Murfin noted that people like living on hills – not necessarily to escape sea level rise –  but because they enjoy better views or other factors. “Elevation,” he said “is an amenity that people always will value.”

The other Cornell paper was co-authored by researchers at the Charles H. Dyson School of Applied Economics and Management. Professor David Ng and assistant professors Jawad Addoum and Ariel Ortiz-Bobea sought economic truth to whether seasonal extreme temperatures – due to climate change – created problems for the economy.

“In both annual and quarterly data, we ended up with a precise set of non-results when measuring the effect of extreme temperatures on average sales and productivity growth,” said Addoum, the paper’s corresponding author.

But follow-up work suggests “the effects are bi-directional,” Ortiz-Bobea said. “Extreme heat in the summertime may help one industry but hurt another. It’s a nuanced view.”

Addoum added that “larger firms with more diversified geographic footprints may be able to mitigate location-specific temperature extremes.” For example: If a heat wave hits the southern U.S. when workers are installing roofs or building a highway, the heat can diminish worker productivity. But a larger construction company could send workers north for a few weeks to work in cooler conditions in order to maintain productivity.

Karolyi has, with the journal’s special climate finance issue, helped create a new space for academic economists to explore the intersection between finance and climate change, Murfin said.

“When we conducted our work on real estate and climate change, we didn’t know what we were going to find,” he said. “I had prior beliefs about what the data would likely tell us. As it turns out, the data led us to truth.”