Exploring Language Tone in Climate Risk Disclosure

Summary

Building on prior studies which have analysed emerging climate risk disclosure practices in Australia, this project involves a textual analysis of the tone of climate risk disclosures by Australian companies since the Paris Agreement was concluded in 2015.

Researchers

  • Dr Luisa Unda (Department of Accounting, Monash Business School & Chair of Corporate Governance, University of Mannheim)
  • Dr Anita Foerster (Department of Business Law & Taxation, Monash Business School)

Project Background and Aims

Climate change is now clearly recognised as a source of financial risk for the private sector. Listed companies have legal obligations to identify and disclose these risks to the market. The way in which companies approach the disclosure and management of climate-related financial risks is a matter of increasing interest for market stakeholders like institutional investors, as well as for regulators and civil society groups. These stakeholders are seeking comprehensive, decision-useful disclosures that demonstrate appropriate risk oversight and management.

This project contributes a unique perspective to the emerging body of legal and regulatory literature concerning climate risk disclosure. It involves a textual analysis of the tone of language used in climate-risk disclosures by Australian companies. It is well established that disclosure tone (e.g. the use of optimistic, pessimistic or neutral language), alongside other factors such as its location, comprehensiveness and complexity, can influence the decision-making of investors and other market stakeholders.

Textual analysis has been widely used in the accounting field to scrutinise the tone of corporate disclosures in a range of different contexts including earnings announcements and environmental disclosures. These studies seek to explore whether and how tone is used as a tool of impression management, or whether it is used for informative purposes, as well as the different determinants of tone such as corporate governance characteristics, financial or environmental performance.

Textual analysis is therefore an alternative analytical tool to help market stakeholders assess a company’s perceptions and managerial judgement about climate-related risks, as well as their preparedness to manage these risks. It can also offer insights to regulators as they develop further regulatory guidance and oversee compliance in this area.

Methodology

This interdisciplinary project combines legal and regulatory analysis with textual analysis of climate risk disclosures. It charts the regulatory context for climate risk disclosure in Australia, including the compliance expectations of regulators and the evolving demands of market stakeholders, particularly institutional investors. This regulatory analysis serves as a foundation for an exploratory investigation of the language tone conveyed by managers in climate change reporting.

Using Australian listed firms in the ASX200 during the sample period 2015-2019, the study locates the disclosure of climate-related risks within the annual reports and identifies the tone of language (by measuring the frequency of positive, negative, litigious, uncertain, modal strong, and modal weak words, following a well-established financial sentiment dictionary). The tonal analysis is evaluated across different sections of the annual report and across different economic sectors. The study then identifies firm and governance characteristics that are associated with different disclosure tones.

Acknowledgements

This project has been supported by a GARNET research grant awarded in 2020.