Research

This paper studies how firms adjust their behavior in response to climate change by analyzing its impact on CEO compensation. Measuring firm-specific climate-related financial risks from earnings conference calls with a state-of-the-art large language model (LLM), I show that climate risks negatively affect CEO total compensation and reduce the proportion of stock-based incentives. These results suggest that firms are increasingly incorporating environmental considerations into their executive pay schemes and reflect managers' concerns about potential negative market impacts of climate change.  These effects became significant only after the Paris Climate Agreement, which marked a turning point for public awareness and institutional action on climate change. Moreover, the impact of climate risk varies across industries based on their exposure to climate issues and is comparable in magnitude to conventional financial performance measures. My findings align with theory and existing climate finance studies, while also addressing inconsistencies in the literature regarding the effect of physical climate risk, such as natural disasters and weather-related risks, by providing new firm-level evidence on its significance.