Climate Solutions
Climate change is often viewed as a risk, but it is also a driver of innovation. By adopting a business opportunity perspective, we explore Climate Solutions—products and services that foster the transition to a low-carbon economy. Examples include solar panels, wind turbines, electric vehicles, battery storage, heat pumps, energy efficient equipment and buildings, and plant-based food products.
We utilize Large Language Models to analyze financial filings, identifying how firms and industries advance climate solutions. This measure of climate solutions allows us to address several crucial questions: What are the risks and financial implications for firms engaging in climate solutions? How do firms that transition their product portfolio towards climate solutions attract and develop the human capital needed to lead a product portfolio transition? What role do different capital providers play in incentivizing or disincentivizing such transitions?
About Our Measure
We fine-tune a GPT3.5 model to identify climate solutions sentences in 10-K Item 1 Business Description.
This figure below plots every climate solutions sentence based on its two-dimensional embedding. Each dot is a sentence, and two sentences are closer together if they are more similar. The colors represent GICS industry groups. 16 prominent climate solutions topics are labeled.
This figure below illustrates the richness of the data, showing the transition from fuel cell to electric vehicles in the automobile industry.
Reference: Lu, S., Serafeim, G., Xu, S., & Awada, M. (2024). Tracking Business Opportunities for Climate Solutions using AI in Regulated Accounting Reports. Harvard Business School Working Paper.
Research Papers
Tracking Business Opportunities for Climate Solutions using AI in Regulated Accounting Reports
What is the landscape of climate solutions?
We observe a rise in the discussion of climate solutions in business descriptions in regulated filings, especially after the Inflation Reduction Act. Topic analysis reveals a focus on climate solutions with greater abatement potential or lower costs, and that apparently dissimilar industries are becoming increasingly interconnected as they focus on the same climate solutions.
The Financial Anatomy of Climate Solutions
Is it profitable for firms to engage in climate solutions?
We classify firms into two categories: those primarily dedicated to climate solutions (Pure CS firms, e.g., Tesla) and those gradually shifting their product portfolios (Transition CS firms, e.g., General Motors). Pure CS firms exhibit a "maturity" effect, starting with lower profitability and higher costs that improve over time with economies of scale. Transition CS firms display a "corporate renewal" effect, where, although they are mature firms, over time their revenue growth is accelerating.
Climate Solutions, Transition Risk, and Stock Returns
How does the stock market value firms with high climate solutions?
We find that the market views firms with high climate solutions as a hedge against future climate transition risks. This hedging value comes from higher profitability in states of the world where there are more emissions reduction regulations, bringing more demand for climate solutions products and services.
Catalysts for Climate Solutions: Corporate Responses to Venture Capital Financing of Climate-tech Startups
How do incumbent firms respond to VC financing of climate-tech startups?
We find that VC investment serves as a signal for the commercial potential of climate solutions. In light of this signal, incumbent firms increase their focus on climate solutions. Stock prices of firms with existing climate solutions also respond positively to this signal.
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Questions? Please contact d3@harvard.edu