While climate change poses clear threats to corporate financial health, from disrupted supply chains to higher insurance costs, our new research shows that climate risks don’t always lead to lower credit ratings. In fact, we find, firms that increase transparency and disclose climate-related risks are often rewarded, by credit rating agencies.

Climate risk is rising but disclosure is shrinking

Extreme weather and climate shocks are no longer distant threats. The European Central Bank warns that droughts alone could shave 15 percent off Eurozone GDP. The world’s largest sovereign wealth fund, Norges Bank Investment Management, estimates that climate change could wipe out nearly a fifth of its U.S. equity portfolio. Insurers globally now face over $150 billion in annual climate-related losses.

And yet, many firms are scaling back their public climate disclosures.

Amid growing political backlash against ESG investing, especially in the U.S., companies have grown more cautious. Alphabet replaced the term “ESG” with “sustainability” in its 2024 core values, without changing its climate goals. Coca-Cola quietly downgraded its climate targets from “subject to change” to “voluntary.” This reflects a widening gap between corporate climate action and communication.

At the same time, reporting fatigue is real. Firms must now navigate overlapping disclosure standards from the U.K.’s mandatory Climate-related Financial Disclosures, to the U.S. SEC’s proposed “Scope 3” emissions rule, to the E.U.’s sweeping Corporate Sustainability Reporting Directive. Some U.S. firms have even withdrawn from European stock exchanges to avoid mounting compliance burdens.

Credit rating agencies are taking notice

Credit rating agencies like S&P Global, Moody’s, and Fitch assign scores that influence borrowing costs, investor confidence, and access to capital. Traditionally, ratings have focused on financial metrics — profitability, debt levels, and liquidity.

But that’s changing. Agencies now increasingly factor in environmental risks. S&P uses climate scenario analysis. Fitch has launched “Climate Vulnerability Signals.” Moody’s warns that physical climate threats are widening the credit gap between developed and emerging markets.

This growing role of climate risks in credit evaluation raises an important question: Does talking more about climate risk hurt or help a firm’s credit standing? That’s what we set out to explore.

Yet even here, mixed signals remain. In 2023, S&P quietly removed ESG scores from its credit ratings, after facing political pressure. That move sparked fears that firms might be discouraged from disclosing climate risks, afraid of being penalized.

Our findings: Disclosure improves credit ratings

We set out to examine how firms’ climate-related communication affects their credit ratings, not in theory, but in practice.

Using 44,905 quarterly earnings call transcripts from 1,546 U.S. firms between 2001 and 2023, we analyzed how often executives mentioned climate risks, including physical threats, regulations, and transition challenges. This approach allowed us to track how climate-related discussion intensity changed within each firm over time, giving us a dynamic view of disclosure behaviour.

Specifically, we used a novel text-based index, developed by a recent study, that measures how frequently climate-related terms appear in a firm’s earnings calls. This serves as a proxy for how actively firms acknowledge and engage with climate risks in their public communication.

We then matched this to S&P’s long-term issuer credit ratings to see whether firms that spoke more about climate risks were rewarded or punished.

The result? Firms that increased climate-related communication – relative to their own historical norm – received higher credit ratings. Even after controlling for financial performance, industry, and risk levels, this relationship held.

It’s not about which firms talk the most – it’s about which firms are talking more than they used to. That change in transparency is what rating agencies appear to value.

In other words, it’s not just climate risk itself that matters – it’s how firms choose to disclose and engage with that risk that credit rating agencies respond to.

Why this matters?

This finding challenges a common assumption: that talking about climate risk makes a firm look vulnerable. Our research suggests the opposite. Increased transparency can signal strong governance, forward planning, and resilience, which are the traits that rating agencies value.

For firms, this is an opportunity. Climate disclosure isn’t just about compliance or reputation; it may help reduce capital costs and strengthen perceived creditworthiness.

For regulators, our findings support efforts to standardize and mandate climate-related disclosures, ensuring markets have consistent, comparable data. Clear, comparable climate reporting standards, like the Task Force on Climate-related Financial Disclosures (TCFD) or the emerging International Sustainability Standards Board (ISSB) framework, can help credit markets more accurately evaluate climate risk and reward strong governance.

And for credit rating agencies, there’s value in making it clear that thoughtful, proactive disclosure will be recognized – not punished.

The bottom line

As businesses navigate the path to net zero, how they communicate their climate risks is just as important as how they manage them. Our study shows that transparency isn’t just good ethics — it’s good finance. In a time of ESG pushback and reporting fatigue, this message is more important than ever: Firms that engage openly with climate risks are more likely to earn the trust of credit rating agencies, and the financial benefits that come with it.

This post comes to us from Erhan Kilincarslan at the University of Huddersfield, Zezeng Li at Queen Mary University of London, and Jiafan Li at the University of Huddersfield. It is based on their recent article, “Firm-level climate change exposure and credit ratings,” available here.