The Financial Anatomy of Climate Solutions: A Large Language Model Approach to Company Classification and Analysis

Leveraging advancements in large language models (LLM), we study the financial characteristics of firms offering climate solutions-products and services aimed at fostering a transition to a low-carbon economy. We use a new measure that applies LLM to 10-K Item 1 Business Description to quantify a firm's focus on climate solutions. To validate this measure, we demonstrate a strong correlation to measures of green patents, green revenues, and climate opportunities discussed during earnings calls. We find that firms with higher climate solutions have superior revenue growth, but also lower profitability margin, attributable to higher cost of goods sold, labor costs, and investments in innovation. Topic analysis shows that the revenue growth is concentrated in climate solutions with higher abatement potential, whereas expenses are higher in climate solutions with higher costs per abatement. We further distinguish between companies primarily dedicated to climate solutions (Pure) and those progressively aligning their product portfolios (Transition), and find that the higher revenue growth is concentrated in Transition firms, whereas lower profitability margin is concentrated in Pure firms. This study underscores the utility of LLMs in analyzing regulated financial documents to assess the economic impact of climate solutions, highlighting their influence on growth, profitability, investments, and operating costs.