When Wharton finance and real estate professor Benjamin Keys went digging for hard data that could help explain the direct relationship between climate change and rising homeowner’s insurance, he struck gold. 

He and his colleagues found a treasure trove of mortgage escrow transactions that included every detail, from physical characteristics of a specific address to policy coverage. It allowed him to take a microscope to the insurance market, zooming in on millions of data points that make up the bigger picture of costly premiums.   

“Insurance markets are extremely liquid markets. They re-price quickly. And we are seeing insurance markets in chaos due to climate change,” he said.  

Premiums have risen 25% since 2019, an increase that is Keys said is strongly correlated with disaster risk going up much faster in certain areas. He said insurance providers are using satellite photos of every property in the nation to price “much more aggressively” than in the past. The result are higher premiums that more accurately reflect the climate risks of specific locations.  

“They are pricing individual-level variation in ways they have never done before,” Keys said. “It’s becoming very sophisticated, and it’s exposing parts of the country that were underpriced previously.” 

Another key revelation from the research is that insurance providers are charging higher rates to homeowners with lower credit scores, even though creditworthiness is not a supposed to be factor in contract characteristics or risk exposure. 

“The worse your credit score, the more you’re going to pay,” Keys said. 

Not only do higher rates for lower credit scores have implications for housing affordability, he said, it sends a confusing message to households trying to manage their money. For example, a homeowner may be faced with the choice of spending $1,000 to pay down credit card debt or to put toward climate-related home improvements. 

Keys said the right choice “is actually paying down your credit card bill, and that means people don’t necessarily have incentives to make their properties more resilient.” 

Download the paper, “Property Insurance and Disaster Risk: New Evidence from Mortgage Escrow Data,” here.  

Deforestation is linked to a wide range of consumer and commercial products, including beef, soy, and palm oil. Because forest protection measures can affect actors with powerful economic interests, regulating deforestation can be politically difficult. At the same time, deforestation has consequences far beyond the loss of trees: it destroys habitat, accelerates biodiversity loss, significantly contributes to climate change, and affects local and global economies, thereby pushing the issue to the forefront. 

“While deforestation regulation might sound like a narrow issue, deforestation is a major driver of biodiversity loss and climate change. So, if we want to address the climate problem, we really need to think about deforestation, too,” Wharton accounting professor Sandra Schafhäutle said. 

In her working paper, “The Spillover Effects of Environmental Transparency and Enforcement Regulation: Evidence from Commodity Trading Firms,” she examines how commodity traders respond to environmental policy in Brazil’s soybean supply chain. The policy increased transparency and enforcement in deforestation-intensive municipalities. Her findings suggest that traders affected by the regulation did not simply shift their sourcing away from regulated municipalities to avoid the costs imposed by the policy. Instead, traders maintained sourcing relationships in regulated municipalities while reducing their exposure to deforestation and associated CO₂ emissions in both regulated and unregulated municipalities.  

The reductions in unregulated municipalities suggest there are positive spillover effects across a trader’s sourcing network. Compared with a control group of traders not exposed to the regulation, exposed traders were associated with about 164 fewer hectares of deforestation—roughly 230 soccer fields—and about 23,000 fewer tons of CO₂ emissions in their sourcing operations. Schafhäutle finds that these spillover effects were strongest among traders facing pressure from downstream stakeholders, traders exposed to enforcement, and traders with greater monitoring capacity, such as established through deforestation audits. 

Commodity traders play an important role in agricultural supply chains by connecting farmers with downstream markets. Schafhäutle said that just five traders dominate the global soybean trade, reporting more than $260 billion in combined assets and $430 billion in revenue in 2023 alone. Because of their strategic position in supply chains, they are well-positioned to drive sustainability improvements. They provide farmers with financing and production inputs, including seeds and fertilizer, and make substantial investments in the regions where they source commodities. This gives them considerable influence over farming practices and land-use decisions. 

“Although these firms are economically important and well connected to farmers,” Schafhäutle said, “they may have limited incentives to change their operations when regulation and external pressures are weak.” 

Her findings show that even a relatively small-in-scope regulation implemented in Brazil can be powerful when paired with transparency and enforcement mechanisms that shape the incentives commodity traders face. 

For his turn at the podium, Wharton legal studies and business ethics professor Brian Berkey dispensed with the PowerPoint slides. He didn’t need them to talk about what he’s working on: a chapter contribution to a business textbook for undergrads. The book’s authors asked him to write about whether the longstanding directive that firms must maximize profits is destroying the planet. His answer was an unambiguous “yes.” 

“I think we need to reject the profit-maximization principle,” he said. “ I think the climate crisis gives us good reason to think that’s just where we are. It’s what we need to do in light of the situation that we face, and we should hold instead that at least sometimes managers, ethically speaking, must take things like the effects on climate directly into account in their decision-making.” 

Berkey explained a standard justification in economic theory that as long as all externalities are internalized, businesses adhering to the profit-maximizing principle will yield optimal outcomes. It’s unusual for economists or scholars to recommend businesses refrain from profit-seeking activities that damage the environment, and it’s often suggested that there’s no conflict between profit and environmental stewardship.  

“The problem, from my perspective, is that there seems to be really good reason to think that profit maximization and environmental responsibility do come into conflict quite often for business,” Berkey said.  

He used the fossil fuel sector to make his argument. It includes some of the largest and most powerful companies in the world, and their choices affect the profit-seeking decisions of other firms. They haven’t changed much about their operations in recent decades, an indication that business-as-usual is highly profitable. 

“As long as fossil fuel firms succeed at making fossil fuel-based energy cheaper than alternative sources, [then] other firms typically are going to have to use fossil fuel-based energy rather than alternatives in order to maximize their profits,” he said. 

The pursuit of max profits also incentivizes fossil fuel companies to block climate regulation. Without regulatory guardrails, profit-maximizing companies will continue contributing to higher carbon emissions. 

“All of this suggests that, at least in circumstances like those in the actual world rather than the hypothetical world, maximizing profit could very well destroy the planet,” Berkey said. 

How much of a firm’s value to society is hidden by traditional financial metrics? 

“A firm’s market value is the present value of its future dividends, whereas a firm’s carbon burden is the present value of the social costs from the firm’s future emissions. The two concepts measure different dimensions of a firm’s value to society, with market value belonging to shareholders and carbon burden representing a negative value borne by all,” said Wharton finance professor Luke Taylor. 

In his recent paper, Taylor and his co-author, Wharton finance and economics professor Robert Stambaugh, estimate the U.S. carbon burden to be $87 trillion, which is 131% of the total value of U.S. corporate equity.

Meeting the Paris Agreement goals would reduce the burden by roughly one-fourth, but emissions forecasts and firms’ own targets fall short of that reduction. 13% of firms have carbon burdens exceeding their market capitalizations, even with indirect emissions excluded. 

“We already knew that climate change is a big problem, but we were still shocked by how large our estimates of the carbon burden are. I didn’t expect firms’ negative value to society through their carbon emissions to be on the same order of magnitude as firms’ financial value to their shareholders. But that’s what we find. It’s another way of seeing how big a problem climate change is,” said Taylor, who is also co-director of the Rodney L. White Center for Financial Research. 

They also found that firms with higher carbon burdens have higher costs of capital, even after controlling for past emissions. Only a small fraction of the burden is priced through that channel, however. 

Taylor and Stambaugh discussed their carbon burden metric during a 2024 interview. Read it here. 

Shareholders wield enormous power, and they’ve used it to bring about change in companies large and small. But when it comes to climate activism, does the behavior of shareholders make any real difference? 

That’s the question Wharton vice dean and management professor Witold Henisz and his colleagues set out to answer in their paper, “Governments and Governance: The Effects of Shareholder Engagement & Climate Laws on CO2 Emissions.” 

The study finds that shareholder activism works most effectively when it’s coupled with governmental regulation. Voluntary pressure and mandatory pressure are complementary, Henisz said. 

The study uses data from Climate Action 100+, an investor-led initiative targeting the largest corporate emitters of greenhouse gases. The paper covers a total sample of 1,444 firms over 10 years and includes direct emissions, known as Scope 1, and indirect emissions, known as Scope 2 or 3. 

“In the year that these firms are targeted by CA 100, there is a decline in the Scope 1 intensity of emissions … and that decline is sustained over time and extends to peer firms through the network of Board interlocks,” Henisz said. “So, climate activism matters.” 

But it doesn’t matter in the same way across the globe. The researchers found that the effect of shareholder activism is greater in countries with stronger climate laws and regulations and, in particular, where such laws are on the books but not being enforced. Furthermore, in such countries, the effect extends to include Scope 2 and 3 as well as Scope 1. 

“In countries like the United States, where our climate laws are strong but not currently being enforced, climate activism becomes really important if we want to reduce emissions,” Henisz said. 

Climate change and financial stability are “the north star” of research for Parinitha Sastry, who recently joined the faculty in the Wharton Department of Finance. 

“A lot of what I’m interested in comes down to the U.S. housing market,” she said. “When someone’s house gets hit by a natural disaster, the question is, who loses? The answer is extremely complicated.” 

That’s because the loss typically affects three parties: the residents, the mortgage lender, and the insurer.  

“In this way, insurance companies are actually the lynchpin in thinking about financial stability,” she said. But insurance markets are in disarray.  

In her dissertation, Sastry examined who bears the flood risk in Florida. The Sunshine State is hit by at least one major hurricane every five years on average, but flood insurance is provided only by the government at a limit of $250,000. She found that mortgage terms are unchanged if the household can be fully insured, regardless of whether the home is remapped into a flood zone. But if the home cannot be fully insured, lenders are requiring higher down payments.  

“They are forcing you to pay a higher down payment because they don’t want to take the risk, and that effect is even stronger for really big houses,” Sastry said. 

The financial exposure is also changing who lives in flood zones, because only those with higher incomes can now afford the increased costs.  

“The takeaway of my paper is that there’s all these crazy distortions in the flood insurance market, but a lot of those distortions are undone in the mortgage market because those lenders are screening for this risk,” Sastry said. 

In a second paper on the insurance market in Florida, Sastry studied firms that only operate in Florida. About 20% have become insolvent in the last 15 years. Despite that rate, a company that is supposed to grade the resiliency of insurers gave them all an “A.” 

“This is a lot like the 2008 crisis. We have inflated ratings that don’t mean anything,” she said, noting that taxpayers ultimately bear the cost of uncovered risk. 

Wildfires in the United States killed 20 to 30 people a year between 2005 and 2004. But recent data estimates the downwind effects of toxic smoke and other wildfire hazards may be responsible for another 5,000 to 15,000 deaths a year during that period. 

It’s a staggering number that environmental and labor economist R. Jisung Park, a professor in the Penn School of Social Policy and Practice, said illustrates the expansive costs of climate change. He describes such climate risks as “subtle” because they are indirect and harder to measure.  

“If you think about what we know about how air pollution affects labor productivity and consumer behavior, the total social consequences may be even larger,” he said.  

Park shared another example of research on workers’ compensation claims in California. On days above 85 degrees, there’s a 5% to 45% increase in workplace injury claims, depending on industry.  Hotter weather is broadly correlated with negative behaviors such as more profanity on social media and poor performance by pro tennis players. 

Park said the science on climate change shows that even with aggressive mitigation, humans have “baked a lot of warming into the system” through carbon emissions. 

“There’s going to be a lot more heat, wildfire, smoke, hurricanes, etc., that we’re going to have to contend with at least over the next two to three decades,” he said.  

But that’s not a reason to give up. Continuing research and collaboration between the public and private sectors can help develop adaptations to cope with rising heat. 

 “If we can get proactive and serious about climate adaptation and resilience, we might have the opportunity to greatly reduce the harm,” he said. 

Park is the author of Slow Burn: The Hidden Costs of a Warming World. Read his co-authored study, “Heat Stress and the Labour Force,” here. 

At least a third of the world’s population is projected to come under severe water distress as the planet warms, said Wharton management professor Leandro (Leo) Pongeluppe. But there’s a technological assist. Desalination plants are in use across the globe, transforming seawater into fresh water that’s fit for human and industrial consumption. In the most prevalent technology, the seawater is passed through a semi-permeable membrane to filter out the salt, generating fresh water and leaving behind a concentrated brine. 

But like most convenient solutions, desalination also has an unintended consequence. Pongeluppe is part of a research team that looked at what happens with all that brine. They found that the ecosystems directly around desalination plants have increasing salinity levels, which increases the water temperature and the chlorophyll. The negative effects were found up to 1,000 kilometers from the plants. 

“The key problem is that if you suddenly increase the salinity, the temperature, and the chlorophyll levels in these oceanic locations, you might be causing [a change in the] stratification of the ocean,” Pongeluppe said. Stratification is a natural layering of seawater that helps regulate climate change and support marine life. 

Pongeluppe and his colleagues estimated that the desalination industry has contributed to 0.5% of the total satellite-observed reduction in global sea ice coverage from 1979 to 2013. “If we keep increasing desalination plants without necessarily treating the brine, this number can increase,” he said. 

The professor praised the beneficial technology, but he said the results of the research are a reminder that consequences cannot be ignored.  

“Whenever we have a new technology, it’s important to consider what negative externalities it might cause and potentially find ways by which regulation can make sure those industries will not cause harms,” Pongeluppe said. 

Read his paper, “Leviathan as Client: Public vs. Private Promotion of Desalination Technology to Address Water Crises, here.