Firms that are more exposed to rising temperatures consistently deliver lower-than-expected returns, according to new research from the University of Exeter Business School.

The study analysed over five decades of US stock data and introduced a measure of temperature sensitivity to assess how companies’ share performance responds to unusual shifts. It found that firms more affected by temperature changes tend to be less profitable, take greater risks, and generate weaker stock returns. Yet these same firms retain relatively high valuations, suggesting investors are underestimating the financial impact of climate change, according to the report’s authors.

The researchers also suggest that local investors familiar with regional conditions are better at pricing in temperature-related risks than non-local institutional investors. Sell-side equity analysts appeared to misjudge the impact of temperature as their forecasts for high-sensitivity firms were less accurate.

A trading strategy that bought stocks of low-sensitivity firms and shorted high-sensitivity ones produced an annualised, risk-adjusted return of about 4% over the 52-year period studied.

Professor Chendi Zhang from the University of Exeter Business School said: “While there is broad consensus about the potential impact of climate change and carbon emissions on firms, surprisingly little has been done to quantify systematically the economic impact of temperature changes for individual firms.

“Our novel, firm-level, market-based measure of temperature sensitivity, which utilises public information available for an extended time period, fills that information gap and our results show that traditional valuation models do not capture how climate change-induced temperature changes are directly affecting firm performance – despite growing investor attention to climate resilience and environmental sustainability.”

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