This paper examines the effect of climate risk on analyst forecast accuracy, proxied by forecast error and forecast dispersion. Using the country-level measure of forward-looking climate risk estimated as time trend in droughts based on the Palmer Drought Severity Index (PDSI), we find that analyst forecasts are less accurate when firms are located in countries with more vulnerability to droughts. Particularly, climate risk tends to increase firms’ earnings volatility, complicating analysts’ forecasting tasks. Also, we find that the effect of climate risk on analyst forecast is more profound in industries vulnerable to climate changes and heavily reliant on consumers’ choices. The relation is more prominent when analysts are less experienced, when firms are with low quality of earnings, and when companies are located in more developed countries. Overall, our findings suggest that climate risk as non-financial information has noteworthy implications for analyst forecast accuracy. 

Keywords: Climate Risk, Climate Change, Earnings Forecast, Earnings Volatility