Introduction

Climate change is altering weather patterns and generating temperature anomalies. Regulatory bodies such as the SEC and European Financial Reporting Advisory Group are pressing for disclosure of material climate risks. However, firms largely provide qualitative disclosures that fail to meet investors’ needs. This study proposes quantitative measures—temperature anomalies (TA) and temperature anomaly variability (TAV)—to assess the financial materiality of climate risks. Variability, more than mean changes, better captures economic consequences by reflecting frequency and intensity of fluctuations, which directly influence firm performance and equity returns.

Data construction

The analysis uses state-level temperature data, adjusted for economic size and population, from 1960–2019. Stock returns are taken from the Russell 3000 index, which represents 97% of investable US equity. Firm-level financial data come from CRSP and Compustat. Geographic exposure is measured by parsing 10-K filings to capture operational concentration across states. Firms with high international revenue exposure are excluded to focus on US operations.

Temperature variability

TA reflects deviations from historical average temperatures, while TAV measures deviations in variability relative to long-run norms. A positive TAV signals greater temperature swings, increasing uncertainty for firms. Higher variability is linked to extreme events such as heatwaves and cold snaps, which disrupt demand and productivity. Compared to measures of extreme hot days used in prior literature, TAV provides a broader and more consistent indicator of risks across the distribution of temperatures.

The implications of temperature on returns and firm performance

Empirical tests show that temperature variability significantly influences equity returns and firm fundamentals. A trading strategy that goes long in firms exposed to low TAV states and short in those in high TAV states generates 39–43 basis points of excess returns per month. Firm profitability declines with higher variability, driven by reduced consumer spending and labour productivity. These operational effects are consistent across industries but vary in intensity, with consumer-facing and labour-intensive sectors particularly vulnerable.

Investor attention also responds to variability. Google search activity on climate change, media coverage, and climate references in earnings calls all increase when temperature variability rises, reflecting heightened market awareness of risks. This attention channel helps explain equity pricing responses.

Measuring and reporting temperature risks using TAV

The study demonstrates that TAV captures more variation in temperature distribution changes than TA, offering stronger explanatory power in financial regressions. TAV remains robust over time, while TA’s explanatory capacity declines in recent periods. TAV provides a scalable, standardised, and publicly verifiable metric for disclosing physical climate risks. Its adaptability across geographies and time horizons makes it a practical tool for firms, investors, and regulators seeking to close climate risk information gaps.

Conclusion

Temperature variability is financially material for firms and investors. Unlike mean changes, variability explains equity returns, profitability, and investor attention. Portfolios exposed to higher variability underperform, reflecting fundamental declines in firm value. TAV is a reliable, quantitative risk metric that can strengthen corporate climate disclosures and guide investment strategies. Adoption of TAV-based measures would support regulatory efforts to standardise reporting and provide investors with decision-useful information on climate risk exposure.