Climate risk is ultimately a valuation problem

A shorter version of this piece was originally posted on LinkedIn — this is the fuller version, with more detail on each valuation channel, the study’s findings, and the practical implications for investors and CFOs.

Climate risk has moved from a sustainability footnote to a core driver of enterprise value. For years, it lived in corporate responsibility reports, ESG scorecards, and disclosure checklists — treated as a reputational or compliance matter rather than a financial one. That framing is now out of date. Climate risk alters expected cash flows, raises the cost of capital, and increases the probability of asset impairments and stranded assets. In other words, it moves the same levers that determine what a company is worth.

The clearest illustration of this shift is what happened to European utilities between 2010 and 2020. Over that decade, the sector wrote down more than €100 billion in fossil-fuel asset values, as rising carbon prices, tightening emissions regulation, and shifting demand patterns forced coal and gas plants into earlier retirement or sharply reduced running hours. These were not abstract climate projections playing out decades into the future — they were balance-sheet events, recognized in real time, that permanently reduced the value of assets that had been built to run for decades longer.

That example captures the argument of this piece in miniature: in practice, climate risk is often treated as a PR problem or a compliance problem. It is, first and foremost, a valuation problem.

Four Channels, One Destination: Enterprise Value

Climate risk does not affect company value through a single mechanism. It moves through at least four distinct channels, each of which feeds into the standard building blocks of valuation — cash flow, discount rate, capital expenditure, and terminal value.

The cash-flow channel. Physical risks — floods, heat stress, drought, supply-chain disruption from extreme weather — and transition risks — carbon pricing, technology shifts, tightening regulation — directly affect revenues, operating costs, capital expenditure needs, and working capital. A flood that shuts down a manufacturing site for weeks is a cash-flow event. A carbon price that rises faster than a company can decarbonize its operations is a cash-flow event. These are not hypothetical future risks; for many companies, they are already showing up in quarterly results.

The discount-rate channel. Investors price climate exposure through higher risk premiums and higher costs of equity and debt, particularly where the risks in question are non-diversifiable or poorly disclosed. A company operating in a flood-prone coastal region, or one heavily exposed to a carbon-intensive supply chain with no credible transition plan, looks riskier to the market — and that added risk shows up as a higher discount rate, which mechanically lowers the present value of every future cash flow the company generates.

The capex channel. Climate risk reshapes the level, timing, and riskiness of investment. Physical hazards and transition mandates force higher adaptation and decarbonization spending — flood defenses, electrification of fleets and facilities, emissions-control retrofits — while policy shifts and changing demand patterns can strand or defer long-lived projects that were planned under old assumptions. The result is higher near-term capital outflows and compressed free cash flow, both of which flow straight through to enterprise value.

The terminal-value channel. This is arguably the least discussed of the four channels, and often the largest. Stranded assets, climate-related litigation, and policy shocks compress long-run growth assumptions and shorten the effective useful life of assets. Because terminal value typically represents the majority of a discounted cash flow valuation — often 60 to 80 percent of total enterprise value in a standard DCF model — even a modest downward revision to long-run growth or asset life assumptions can have an outsized effect on the final number. This is why the European utilities writedowns were so large relative to the underlying operational disruption: the market wasn’t just repricing near-term cash flows, it was repricing the entire long-run trajectory of the business.

What the Evidence Shows

This is not just a theoretical framework. A 2026 study by Dell’Atti, Foglia, and Onorato found that higher climate-risk exposure correlates with lower market-to-book ratios and lower Tobin’s Q — a standard measure comparing a company’s market value to the replacement cost of its assets. Firms that ignore climate risk face measurable valuation discounts, while those with credible, well-disclosed transition strategies can command a valuation premium relative to peers.

This finding matters because it moves the conversation from should companies manage climate risk to are markets already pricing it in — and the answer, increasingly, is yes, at least where disclosure is good enough for investors to act on. That last qualifier is important: markets can only price risks they can see. Poor or inconsistent climate disclosure doesn’t eliminate the underlying risk, it just means the discount-rate channel operates with more noise and less precision, often defaulting to a higher risk premium simply because uncertainty itself is expensive.

One useful pattern worth watching: insurance markets tend to reprice physical climate risk well before equity markets do. Insurers have to underwrite specific, quantifiable physical exposures — flood zones, wildfire risk, hurricane paths — on an annual cycle, which forces faster repricing than equity analysts typically apply. When insurers start pulling back from a market or sharply raising premiums in a given region or sector, it is often an early signal of a valuation adjustment that equity markets have not yet fully made. For investors paying attention to physical risk, insurance pricing can function as a leading indicator.

Implications for Investors

For investors, the practical takeaway is to treat climate exposure as a factor that shifts both sides of the standard valuation equation: the numerator, in the form of expected cash flows, and the denominator, in the form of the discount rate applied to those cash flows.

This means integrating scenario-based cash-flow modeling rather than relying on a single base-case projection, and treating disclosure quality itself as a valuation signal rather than a compliance checkbox. Companies reporting under frameworks like the ISSB or TCFD standards are giving analysts the granular data needed to price climate uncertainty with more precision — which, all else equal, should translate into a lower risk premium than a company with vague or boilerplate climate disclosure. Investors and analysts increasingly use the quality of this disclosure as an input to the discount-rate channel directly.

It’s also worth building a habit of monitoring insurance market signals alongside equity research — not as a replacement for fundamental analysis, but as an early warning system for physical risk that hasn’t yet been reflected in share prices.

Implications for CFOs and Corporate Strategy

For CFOs and strategy teams, the priority is mapping transition and physical risks directly to the value chain — not as a standalone climate risk register, but as an integrated part of financial planning. That means quantifying cash-flow impacts under multiple climate pathways (not just a single central scenario), and explicitly aligning capital expenditure and portfolio decisions to avoid building or acquiring assets that carry meaningful stranding risk.

Credible transition plans matter here — not glossy sustainability reports, but plans with specific capital commitments, timelines, and interim targets that investors and rating agencies can actually underwrite. Alongside this, resilient and diversified supply chains help protect the cash-flow channel directly, reducing exposure to single-point physical disruptions.

The companies that get ahead of this are not necessarily the ones spending the most on climate initiatives — they are the ones that can clearly show analysts how those initiatives protect cash flow, reduce the discount rate applied to their equity, and preserve long-run terminal value.

The Bottom Line

Many argue that climate risk is still underpriced in equity markets relative to what physical risk models suggest it should be. That gap will not close on its own — investors must price it in deliberately, by demanding better disclosure and by treating climate exposure as a core financial variable rather than a sustainability initiative running in parallel to the “real” business.

Climate risk is not a line item. It is central to how a company is valued — through cash flows, through the discount rate, through capital allocation, and through the long-run assumptions that determine terminal value. The sooner that gets reflected in how companies report and how investors model, the sooner the mispricing starts to close.

Where do you see the biggest mispricing today: equities, credit, or insurance?

Corporate Climate Data Has a Trust Problem

A shorter version of this piece was originally posted on LinkedIn — this is the fuller version, with more detail on the study’s findings and the global regulatory picture.

More than half of major U.S. corporations quietly revise their reported emissions after the fact — and when they do, the errors overwhelmingly go in one direction: down. That’s the central finding of a new study in Nature Climate Change by Cohen, Rouen and Sachdeva, and it raises uncomfortable questions for anyone relying on corporate climate data — regulators, investors, and the companies themselves.

What the study found

The researchers examined a decade of Corporate Social Responsibility (CSR) reports from major U.S. firms, tracking how self-reported Scope 1 emissions changed between initial disclosure and later restatement. The pattern was remarkably consistent:

  • 58–60% of firms’ self-reported Scope 1 emissions were later revised — a rate that has not meaningfully changed over ten years, despite growing regulatory and investor attention to climate disclosure.
  • Understatements outweigh overstatements by roughly 2:1. In a related analysis of S&P 500 companies, underreported emissions totalled approximately 135 million tons of CO2e, compared to about 57 million tons overreported — a net gap larger than the annual emissions of many mid-sized countries.
  • Neither third-party assurance nor documented methodology changes fully explain the pattern. Companies that pay for external verification of their emissions data are not meaningfully less likely to revise it later.
  • Data providers and ESG databases don’t consistently update when companies restate their numbers. This means outdated, incorrect figures can continue circulating in ESG scores, sustainability rankings, and investor models long after a company has quietly corrected them in a footnote.
Bar chart comparing underreported (135 million tons) vs. overreported (57 million tons) corporate emissions

Why this is happening

A few explanations emerge from the research and the broader literature on corporate disclosure:

There’s no audit function for emissions data the way there is for financial data. Financial restatements are rare and trigger real scrutiny — from auditors, regulators, and sometimes the SEC. Emissions restatements, by contrast, are common, largely unexplained, and often buried in a footnote or an updated appendix rather than flagged as a correction.

The measurement infrastructure is still maturing. Financial accounting has had roughly a century of standardisation, enforcement, and case law to work out consistent rules. Greenhouse gas accounting is comparatively young. Methodology changes, mergers and acquisitions, and shifting emissions-factor databases can all move historical numbers retroactively, and it’s not always clear from the outside whether a revision reflects better data or something else.

Incentive design may play a role. The study finds a suggestive—not conclusive—correlation between executive compensation tied to emissions targets and the direction of subsequent revisions: numbers move in a less favourable direction before a compensation link kicks in, and in a more favourable direction afterwards. This doesn’t prove manipulation, but it raises legitimate questions about how targets are set, measured, and audited when real money is riding on the outcome.

Why measurement accuracy matters beyond the numbers themselves

It’s tempting to treat this as a data-quality footnote. It isn’t. Emissions data is a foundational input into decisions with real consequences:

For policy design, carbon budgets, sector-specific regulations, and national climate commitments are all calibrated against baseline emissions figures. If those baselines are systematically off — especially if they’re skewed toward understatement, as this research suggests — governments risk setting targets that are too lax relative to the actual scale of the problem, or building compliance frameworks around numbers that don’t hold up to scrutiny.

For capital allocation, green financing, net-zero-aligned investment portfolios, and ESG-linked financial products all depend on emissions data to direct capital toward genuine climate performers. When the underlying numbers are unreliable, capital risks flowing to companies that look better on paper than in practice, while genuine leaders — who may report more conservatively or face more scrutiny — go underrecognized and undercapitalised. Bad data doesn’t just distort rankings; it can misdirect real money.

For corporate strategy itself, a company managing toward a flawed baseline can end up optimising for the wrong target — declaring victory on a reduction that was never real, or missing a risk that was hiding in the numbers all along.

The regulatory backdrop — and a global patchwork

This research lands at a pointed moment for U.S. climate policy. With the SEC’s climate disclosure rule shelved, the regulatory vacuum in the U.S. is increasingly being filled by other frameworks: California’s climate disclosure laws, the EU’s Corporate Sustainability Reporting Directive (CSRD), and the International Sustainability Standards Board’s (ISSB) global baseline standards. Multinational companies will need to navigate this patchwork regardless of what happens federally in the U.S.

The picture outside the U.S. is similarly mixed. In India, the Business Responsibility and Sustainability Reporting (BRSR) framework has driven a sharp increase in the volume of corporate emissions filings in recent years. But reviews from the Council on Energy, Environment and Water (CEEW) and CFA Institute (in partnership with CFA Society India and the National Stock Exchange) have flagged ongoing inconsistencies in data quality and comparability across companies, even as overall disclosure volume improves. No study equivalent to this one — tracking restatements over time — has yet been done for the Indian market, so it’s an open question how the same underlying dynamics play out there. Given the direction the U.S. data points, it would be surprising if similar issues weren’t present.

The bottom line

We are not measuring corporate emissions with anything close to the rigour we apply to corporate earnings — and the data suggests the errors aren’t randomly distributed. Until emissions accounting has the audit infrastructure, standardisation, and accountability that financial accounting has built up over decades, self-reported climate data should be treated as directionally useful rather than decision-grade, particularly for high-stakes uses like net-zero commitments, green financing, and regulatory compliance.

Sources: Cohen, Rouen & Sachdeva, “Widespread Revisions of Self-Reported Emissions by Major US Corporations,” Nature Climate Change (2025); CEEW issue briefs on BRSR and emissions disclosure; CFA Institute, “The Current State of BRSR at Corporate India” (2024).

Insetting or Offsetting: What’s the choice?

While we frequently read about carbon offsets, carbon insets are less commonly known. Carbon offsets, as we understand, are tradable “rights” or certificates linked to activities that reduce the amount of carbon dioxide (CO2) in the atmosphere. By purchasing these certificates, an individual or organisation can support projects that address climate change instead of decreasing their own carbon emissions.

Carbon insets are pretty similar to carbon offsets, with one significant difference – here, a company reduces or removes carbon emissions within its own value chain, rather than offsetting them through unrelated external projects.

Some examples of carbon insetting are:
L’Oréal collaborates with shea butter suppliers in Burkina Faso to restore local ecosystems and enhance agricultural practices — directly lowering emissions in its sourcing regions.

Ben & Jerry’s collaborates with dairy farmers in its supply chain to implement regenerative farming practices that reduce methane emissions from cows and sequester carbon in soil.

Insetting is often seen in industries such as coffee, cocoa, dairy, fashion, and cosmetics, where natural resources and farming play a central role.

While carbon offsetting is often associated with the risk of greenwashing, carbon insetting offers a good opportunity to reduce scope 3 emissions. Insetting, being part of a company’s value chain linked to producing countries, makes it easier to align with a country’s NDCs (Nationally Determined Contributions). Insetting encourages companies to focus on areas such as regenerative agriculture, renewable energy, and ecosystem restoration.

There is a need to shift from offsetting to insetting to promote a more integrated climate action. Carbon offsets will still be relevant for residual emissions.

The Case for Urban Forests

Once upon a time, we lived an agrarian life and were surrounded by nature. Gradually, our lives turned urban, and now we are surrounded by concrete. Plants and trees that are critical lungs for human well-being have almost disappeared. This has brought forward the need to bring nature to the cities to make urban living sustainable.

Photo by Arno Senoner on Unsplash

Urban forests are a cost-efficient, scalable, nature-based solution that can make urban living sustainable. They also help in climate change adaptation and mitigation. What are urban forests? According to Wikipedia, “An urban forest is a forest, or a collection of trees, that grow within a city, town or a suburb. In a wider sense, it may include any kind of woody plant vegetation growing in and around human settlements.”

Some of the key benefits of urban forests are:

a. Trees act as a breath of fresh air in the urban landscape. Strategically planted trees can create pockets of oxygen-rich haven in the midst of concrete. Trees are nature’s air purifiers, filtering pollution and releasing clean oxygen.

b. Urban forests also act as a means of carbon sequestration. Trees are the most natural mechanism for carbon sequestration and help reduce GHG emissions in cities.

c. Trees can help improve cities’ biodiversity and act as wildlife habitats. They attract many kinds of birds and animals and can help protect many species.

d. By reducing temperature within cities, they act as a natural mechanism for energy-efficient cooling.

e. A visit to urban forests can help improve its citizens’ physical and mental well-being.

While many cities worldwide boast urban forests, every city should have one. With the increasing population of cities, a greater area of urban forest is needed to provide fresh and clean air.