Climate Change and Corporate Financial Performance

Abstract

Climate change impacts will continue to worsen with rising greenhouse gas (GHG) emissions, underscoring the growing necessity to foresee and comprehend the impact of climate change risks on economic activity. Using quarterly firm-level data of 209 firms from the People’s Republic of China (PRC) over the period Q1 2018–Q2 2022, this study estimates the impact of firms’ exposure to climate-related risks on their financial performance. The results indicate a notable adverse effect of climate change exposure on firms’ rate of return, with a lag of around two years. Firms located in more climate-vulnerable coastal areas and high-income provinces experience relatively greater negative impacts on their financial returns. Our findings have important policy implications for firms aiming to maximize their returns through enhanced climate change mitigation and adaptation efforts.

1. Introduction

Climate change and global warming have led to extreme weather events, severely affecting human health, food security, livelihoods, and economic activities. The negative repercussions for affected economies are substantial, with output losses affecting longer-term growth potential, causing a decline in investment and employment, and hindering the progress toward achieving the Sustainable Development Goals (SDGs) (Berkhout et al. 2006; Busch et al. 2022). Without appropriate climate action and reducing GHG emissions, the economic effects of climate change will continue to worsen, underscoring the growing importance of comprehending and anticipating the impact of climate change risks (Dell et al. 2014; Mihaylova and Blumer 2022). This paper examines the impact of corporate climate vulnerability and climate risk management on firm performance, with a particular focus on firms located in climate-vulnerable coastal areas and more affluent Chinese provinces.

The channels through which climate change affects corporate financial performance are well documented in the literature. Climate change could shift the economic growth pattern of regions and comparative advantage (Moyo and Wingard 2015). Sun et al. (2020) observe that the risks associated with climate change influence corporate financial performance through a dual pathway, encompassing both direct (physical) impacts and indirect channels. Direct impacts include a wide array of consequences, including implications for core operations, such as damage to production materials and infrastructure. Additionally, disruptions in the value chain, such as an interrupted supply of raw materials, and infrastructural effects, such as damage to transportation, communication, and energy supply networks, further compound the challenges faced by corporations. Additionally, Cevik and Miryugin (2023) highlight the challenge non-financial firms in climate-exposed countries face in accessing debt financing. They also observe that these firms tend to be less productive and less profitable than those in countries with lower vulnerability to climate change.

The indirect impacts of climate change on corporate financial performance are equally significant. These include climate-related financing constraints, such as carbon pricing, emission regulation, and other climate-related policies, which can impose additional costs and financial burdens on companies. For example, climate change mitigation efforts may substantially influence businesses’ operational costs across critical areas such as energy consumption, production costs, and supply chain management, which in turn affect the corporate financial performance (Owusu and Asumadu-Sarkodie 2016; Secinaro et al. 2020). Furthermore, reputational considerations play a crucial role, as an increasing proportion of investors focus on environmental, social, and governance (ESG) factors. Companies with poor environmental records or inadequate climate change mitigation strategies may face reputational damage and diminished investor confidence, ultimately impacting their ability to attract consumers, secure favorable financing terms, and maintain shareholder support. This can lead to higher costs of capital, reduced access to funding, and potential declines in revenue, thereby negatively affecting corporate financial performance (Heal 2005; Siddiq and Javed 2014).

Legal matters also contribute to the indirect impacts of climate change on corporate financial performance. Changes in laws or regulations related to climate change, such as stricter environmental standards or emissions regulations, can result in increased compliance costs and legal liabilities for corporations. For instance, Fang et al. (2019) show how climate change issues can trigger stricter environmental regulations and social norms, leading to higher costs of emissions or lower costs of green technologies for companies. These changes subsequently affect corporate operational costs and financial performance, highlighting the complex interplay between environmental regulations, technological innovation, and financial outcomes for corporations (Secinaro et al. 2020).

Most of the empirical literature underscores the adverse effect of climate change exposure on corporate financial performance (Huang et al. 2018; Almaghrabi 2023). For example, using a sample dataset of Chinese listed firms from 2009 to 2021, Wu et al. (2022) investigate the impact of climate risks on the stock market. Their results indicate that greater corporate climate risks lead to negative market reactions in the PRC. Cooper et al. (2018) describe the impact of GHG emissions on company valuation, revealing a dual cost scenario. They note that GHG emissions lead to a reduction in company value due to both the anticipated negative cash flow associated with emissions in the future and the diminishing reputation regarding corporate social responsibility. More recently, Almaghrabi (2023) found that heightened exposure to climate change negatively impacts corporate performance. However, proper climate risk management can alleviate the adverse influence of climate change exposure on financial performance.

Climate risk management is a set of mechanisms, which aims to address the risks and opportunities associated with climate change. It involves a comprehensive approach to mitigate and adapt to the impacts of climate change, integrating environmental considerations into business operations, decision-making, and long-term planning (Aibar-Guzmán et al. 2024). Adopting climate risk management measures, such as low-carbon strategies and proactive disclosure of emission information, is believed to enhance corporate brand value and create new competitive advantages for long-term development (Sun et al. 2020).

The empirical literature consistently finds a positive relationship between climate risk management and corporate financial performance (Ntim and Soobaroyen 2013; Qian et al. 2020; Okafor et al. 2021). Similarly, Ziegler et al. (2011) discover a positive correlation between disclosed corporate responses to climate change and stock performance among energy firms in the United States. Perlin et al. (2022) conducted a study on Brazilian industrial companies and concluded that firms with a high degree of climate change mitigation and adaptation practices demonstrate better market performance. Additionally, one most recent empirical research study by Aibar-Guzmán et al. (2024), using a sample of 832 multinationals for the period 2011–2020, found that effective climate governance leads to better corporate financial performance.

The literature examining the potential economic impacts of climate change is large and growing rapidly. However, significant gaps remain. Empirical research investigating the firm-level impacts of climate change in the PRC remains relatively scarce. In addition, the existing empirical literature based on firm-level data often uses a country-level climate vulnerability measure (Acevedo et al. 2020). Such a measure may not be sufficiently accurate to assess firms’ climate exposure, especially in large countries like the PRC. While difficulties in gathering data on firm-level climate exposure remain, it needs to be borne in mind that firm-based analyses using country-level climate exposure measures should be interpreted with caution (Bernstein et al. 2019; Hong et al. 2019; Choi et al. 2020). Additionally, existing firm-level research overlooks the substantial regional economic disparities and the varying levels of sensitivity to climate change within the countries. This is crucial because economic development varies widely across regions within one country, profoundly impacting the economic performance of companies operating at the regional level.

To fill these research gaps, this paper empirically investigates the impact of firms’ climate change exposure and climate risk management on corporate financial performance using a fixed effects panel model. This study covers a firm-level panel dataset of 209 firms over the period Q1 2018 to Q2 2022 in the PRC. More specifically, this study utilizes two measures of firms’ climate change factors: (i) the Financial Times Stock Exchange (FTSE) climate change exposure score and (ii) the FTSE climate risk management score, which is a more comprehensive measure than that used by Wu et al. (2022). Our results show a significant negative impact of firms’ climate change exposure on their rate of return, especially in the long term. The effect is more substantial for firms in coastal areas and high-income provinces. The empirical results imply that activities to reduce climate change exposure (such as integrating climate risk considerations into business models and implementing emission reduction initiatives) could improve firm performance.

The study makes two contributions to the existing literature. First, it adds to the limited body of empirical literature in the PRC concerning the impact of climate change exposure and climate risk management on firm corporate financial performance. Specifically, the study encompasses 209 companies from 20 different provinces across the PRC. These provinces vary in economic development levels and exposure to environmental changes. We estimate subpanels for economically developed versus less developed regions, as well as coastal versus non-coastal areas. This approach allows for a more comprehensive and detailed analysis, providing practical insights that are more nuanced and region-specific.

Secondly, prior research primarily focuses on the effect of GHG emission-related risks or policies on corporate financial performance. By extending the investigation beyond these areas, this study broadens the scope to include climate change exposure and climate risk management, thereby providing a more comprehensive understanding of the factors influencing financial outcomes for firms. This holistic approach offers deeper insights into the multifaceted relationship between climate change and corporate financial performance. The remainder of this paper is structured as follows. Section 2 provides the data and methodology. Section 3 discusses the results. Section 4 concludes and provides policy recommendations.

2. Data and Methodology

2.1. Dependent Variable and Climate-Related Key Variables

The dependent variable of interest is return on assets (ROA), which is calculated as the ratio of a firm’s net income to its total assets’ book value. ROA is a widely accepted financial performance metric that reflects a firm’s profitability and efficiency in generating returns from its assets (Peters and Mullen 2009; Gallego-Álvarez et al. 2014; Sun et al. 2020; Cevik and Miryugin 2023). It provides valuable insights into how effectively a company is deploying its resources to generate earnings, irrespective of its size.

To investigate the effect of climate change on corporate financial performance in the PRC, this research utilizes a firm-level fixed-effect panel model across a dataset comprising 209 Chinese-listed firms from 20 provinces. Studying the impact of climate change on firm financial performance in the Chinese market holds academic importance due to the PRC’s high economic significance, geographical diversity, and global influence. The PRC, as one of the world’s largest economies, offers a diverse economic landscape spanning various industries and regions. Its geographical diversity encompasses climate-vulnerable coastal areas and affluent inland provinces, providing a unique opportunity to examine the differential impacts of climate vulnerability on firms. Our dataset spans the period from 2018 to 2022 with a quarterly frequency.

Given the considerable heterogeneity in economic development levels and environmental susceptibility among Chinese provinces, this study further includes three sub-panels in the analysis: coastal provinces, the top 25% GDP per capita provinces, and the top 50% GDP per capita provinces. Such disaggregation allows for a more granular examination of the way in which varying degrees of exposure to climate-related risks intersect with differing economic conditions.

Coastal provinces, for instance, are often characterized by heightened vulnerability to climate change due to their reliance on maritime activities, exposure to extreme weather events and properties which could potentially be affected by the rising sea level, whereas regions within the top percentiles of the GDP per capita may exhibit varying levels of economic resilience and adaptive capacity to climate impacts. By delineating our analysis into these sub-panels, this study aims to discern the differential effects of climate change on corporate financial performance, thereby enriching our understanding of the complex interplay between climate dynamics, regional economics, and corporate outcomes within the Chinese context. This approach not only enhances the robustness of our findings but also facilitates the identification of targeted policy interventions and adaptation strategies tailored to specific regional needs, fostering more effective climate risk management and sustainable economic development pathways in the PRC.

To capture the impact of climate change on firms’ financial performance, this study employs two firm-level variables: (i) the climate change exposure score and (ii) the climate risk management score data extracted from the FTSE database. The FTSE climate change exposure score measures a company’s relevance to climate change-related risk and is largely determined by industrial activity and operational presence. The FTSE climate change exposure score evaluates various factors including food security, sustainable agriculture, GHG emissions, and access to affordable, reliable, sustainable, and modern energy. FTSE climate change exposure scores typically range from 0 to 3, where 3 is the highest exposure and 0 indicates that climate change does not affect the company. Companies with higher exposure scores are deemed to be more susceptible to climate risks.

The FTSE climate risk management score evaluates a company’s efforts and strategies for managing climate-related risks and opportunities. This score assesses the company’s commitment to climate change mitigation, adaptation, and disclosure practices. It considers factors such as the existence of a climate change policy, the integration of climate considerations into business strategies, the implementation of emission reduction initiatives, and the level of transparency in reporting climate-related information. FTSE climate risk management scores range from 0 to 5. A higher climate risk management score indicates that a company is taking proactive measures to address climate risks, incorporating sustainability practices into its operations, and aligning its business with the goals of the Paris Agreement and other international climate frameworks. This score provides investors and stakeholders with valuable insights into a company’s environmental stewardship and long-term sustainability.

The details of the variable definitions, descriptive summary statistics, and correlation matrix are provided in

Table 1. Overview of variables used in the empirical analysis.

Variable	Definition	Data Source
ROA	Net income to total asset ratio	S&P Capital IQ 1
Exposure	Exposure to climate change risks	FTSE Russel 2
Management	Management of climate change risks	FTSE Russel
Stringency Index	OxCGRT COVID-19 stringency index, to measures the variation in governments’ responses to COVID-19	Hale et al. (2021)
GDP per capita	GDP per capita by province	CEIC 3
Urban population ratio (%)	Urban population ratio	CEIC
Total asset (log)	The natural logarithm of total asset	S&P Capital IQ
Financial leverage (%)	Total debt as a percentage of shareholder’s equity	S&P Capital IQ
Revenue growth (%)	Revenue growth rate	S&P Capital IQ
Age	Firm age	S&P Capital IQ

Note: ¹ The data are available at https://capitaliq.com, accessed on 23 March 2023. ² The ESG data from FTSE Russel are available at https://data.ftse.com, accessed on 23 March 2023. ³ The data are available at https://www.ceicdata.com, accessed on 23 March 2023.

,

Table 2. Summary statistics of variables used in the empirical analysis.

Variable	Obs	Mean	Std. Dev.	Min	Max
ROA	3553	2.67	4.63	−74.36	32.36
Exposure	3246	2.13	0.79	1.00	3.00
Management	3246	1.25	0.94	0.00	3.00
Stringency Index	3752	31.11	29.67	0.00	97.22
GDP per capita	3762	31,069.41	11,762.57	9180.79	48,120.91
Urban population ratio	3762	0.79	0.11	0.45	0.89
Total asset (log)	3624	9.90	1.78	6.37	15.59
Financial leverage	3496	1.01	1.80	−35.49	60.64
Revenue growth	3636	15.10	34.44	−93.58	288.95
Age	3294	29.94	22.91	2.75	174.00

Note: Compiled by the authors.

and

Table 3. Correlation matrix of variables used in the empirical analysis.

	ROA	Exposure	Management	Stringency Index	GDP per Capita	Urban Population Ratio	Total Asset (log)	Financial Leverage	Revenue Growth	Age
ROA	1
Exposure	0.050	1
Management	−0.119	−0.382	1
Stringency Index	−0.079	−0.031	0.176	1
GDP per capita	−0.138	−0.225	0.189	0.222	1
Urban population ratio	−0.192	−0.209	0.132	0.096	0.852	1
Total asset (log)	−0.232	−0.237	0.436	0.100	0.264	0.288	1
Financial leverage	−0.243	−0.171	0.199	−0.018	0.105	0.182	0.384	1
Revenue growth	0.200	−0.032	0.005	−0.088	−0.011	−0.024	−0.003	−0.018	1
Age	0.000	−0.039	0.061	0.045	0.000	−0.017	0.054	−0.099	−0.078	1

Note: Compiled by the authors.

. The descriptive statistics reveal noteworthy patterns among the selected variables of interest. The average exposure variable of 2.13 (ranging from 0–3), accompanied by a relatively small standard deviation of 0.79, suggests an overall high level of climate change vulnerability among firms operating within the PRC. Similarly, the average climate risk management score of 1.25 (ranging from 0–5), combined with a standard deviation of 0.94, signifies a spectrum of managerial quality among the sampled firms and a low level of climate risk management. These observations collectively underscore the multifaceted nature of the economic and operational landscape within the PRC. Based on the correlation matrix, the independent variables generally exhibit low correlations, suggesting the absence of multicollinearity issues. While awareness of climate change is rising among Chinese firms, corresponding measures to address the climate risk are still not in place.

2.2. Methodology

We estimate the following baseline Equation (1) to test the impact of climate change factors on corporate financial performance.

ROA_i,t = α₀ + α₁ Exposure_i,t−1 + α₂Management_i,t−1 + α₃X_i,t−1 + α₄Macro_j,t−1 + δ_i + u_i,t

(1)

where i, j, and t denote the firms, the provinces where the firms are located, and time indices, respectively. Exposure_i,t−1 represents the firms’ exposure score to climate change risks. Management_i,t−1 represents the firms’ climate risk management score of climate change risks. Vector X_i,t−1 represents a series of corporate-specific control variables. Vector Macroj,t−1 represents domestic macroeconomic factors. Our analysis employs a fixed-effects regression model to control for unobserved heterogeneity across the firms. This is particularly important in the context of evaluating the impact of climate change, as it isolates the effect of climate factors from firm-specific and time-invariant influences. In Section 3, we also use the Hausman test to confirm that the fixed-effect regression model is the appropriate estimation model. δ_i represents a firm fixed effect, while u_i,t is the error term.

This analysis initially regresses on the entire sample of 209 firms across 20 Chinese provinces to assess the overall impact of climate change factors on corporate financial performance. This comprehensive analysis provides a broad overview of how climate variables influence firms across diverse regions. To further refine our understanding, we also perform separate analyses for firms located in coastal areas and those in high-income regions. Coastal firms are likely to experience distinct climate-related challenges, such as rising sea levels and increased storm frequency, which may affect their financial performance differently from firms in inland areas. Similarly, firms in high-income regions may have more resources and infrastructure to adapt to climate impacts, leading to variations in their financial responses compared to those in lower-income areas. By examining these subgroups, we aim to identify specific regional and economic differences in how climate change factors affect corporate performance, providing a more detailed and context-sensitive analysis.

We incorporate a series of corporate-specific control variables (Vector X_i,t−1) such as firm size, revenue growth, company age, and financial leverage to account for other factors that may influence firms’ financial performance (Cho and Tsang 2020). The natural logarithm of the total assets serves as a metric for firm size and is widely acknowledged as a pivotal factor influencing corporate financial performance. Larger firms typically benefit from economies of scale and wield greater bargaining power over suppliers and buyers, potentially leading to a positive impact on corporate value. Consequently, we anticipate a positive correlation between firm size and ROA.

Financial leverage, calculated as the ratio of debt to equity, constitutes a crucial instrument for companies in determining suitable financing and investment strategies. Maintaining a stable and optimal capital structure is pivotal for enhancing corporate financial performance. It is anticipated that higher revenue will be associated with higher ROA, reflecting a company’s ability to generate greater profits from its assets.

Climate change typically influences corporate financial performance through macroeconomic channels, such as provincial economic development. The literature extensively documents the effects of climate change on economic development, often manifested through increased frequency and severity of natural disasters. These events can disrupt economic activities, damage infrastructure, and hinder business operations, thereby affecting corporate profitability and growth prospects (Volz et al. 2020; Loayza et al. 2012; Raddatz 2009). We include three domestic macroeconomic factors in the regression, as represented in the vector Macro_j,t−1: the COVID-19 exposure, provincial GDP per capita, and urban population ratio in the respective provinces. These variables offer insights into broader economic conditions that may interact with climate change to affect corporate financial outcomes.

The COVID-19 pandemic has had a profound impact on corporate financial performance through various channels, such as disruptions to supply chains, shifts in consumer behaviors, operational challenges, and financial market volatility. The Oxford Stringency Index serves as a proxy for COVID-19 exposure, offering a quantitative and comprehensive assessment of the stringency of government efforts to tackle the pandemic, such as travel restrictions, lockdown policies, and so on. (Hale et al. 2021). COVID-19 data are not available at the firm level because such COVID-related restrictions were implemented at the provincial level.

Economic development varies across different provinces in the PRC. According to the statistical summary in Table 2, the mean GDP per capita of the provinces reaches CNY 31,069.41 but with a substantial standard deviation of 11,762.57, highlighting the considerable economic heterogeneity prevalent across provinces within the People’s Republic of China (PRC). Thus, it is important to consider and incorporate specific macroeconomic factors related to each province when analyzing the factors affecting corporate financial performance: the provincial GDP per capita and urban population ratio. A higher provincial GDP per capita indicates a larger consumer market with greater purchasing power. Companies operating in provinces with a higher GDP per capita are likely to benefit from a greater consumer demand, leading to higher sales revenues and potential growth opportunities. Moreover, the provincial GDP per capita can reflect the overall economic conditions and investment climate. A higher GDP per capita suggests a more developed and prosperous economy, which may attract more domestic and foreign investments. An improved investment climate, including access to capital, infrastructure, and skilled labor, can influence a company’s financial performance positively by providing resources for expansion, innovation, and productivity enhancements.

According to the existing literature, the impact of climate change factors on corporate financial performance can exhibit differing dynamics over short and long-term horizons. Notably, climate change factors may not yield immediate short-term effects on a firm’s financial performance. However, these effects on financial performance metrics tend to materialize with a time lag. Specifically, the studies by Hang et al. (2019) and Hart and Ahuja (1996) indicate that a period of approximately two years is typically required before the impacts on financial performance become evident.

In light of these findings, our regression analysis incorporates a strategic approach to account for this temporal lag. In the baseline regression model, we introduce a lag of one period for the climate change variables and other variables to mitigate the endogeneity concerns. Furthermore, to account for the lagged impact of climate change on firm performance, we also explore a regression wherein the climate change variables are lagged by eight periods (i.e., eight quarters, or two years). This dual regression framework allows us to examine comprehensively the potential time-delayed effects of climate change factors on corporate financial performance and also serves as a robustness check.

3. Empirical Analysis and Discussion

Prior to conducting the regression analysis, we employ the Levin–Lin–Chu (LLC) test and the Fisher augmented Dickey–Fuller (Fisher ADF) test to assess the stationarity of the variables. The outcomes reject the null hypothesis of unit roots for each variable, indicating that the variables are stationary at their levels. Therefore, all variables are included in the econometric model at their levels.

To further confirm the appropriate estimation approach for our analysis, we conducted a Hausman test, a widely recognized method for assessing the choice between fixed effects (FE) and random effects (RE) models. The Hausman test examines whether the differences in coefficients between FE and RE models are systematic. Our findings (

Table 4. Hausman test results: fixed effect model vs. random effect model.

Test of H0: Difference in coefficients not systematic

chi2(6) = (b-B)’[(V_b-V_B)^(−1)](b-B)    = 36.65

Prob > chi2 = 0.0000

Source: Author’s calculation based on Stata.

) indicate strong statistical evidence rejecting the null hypothesis that these differences are not systematic. Therefore, based on the Hausman test results, we conclude that the fixed effects model is more appropriate for our data. This decision is supported by the assumption that individual-specific effects are correlated with the explanatory variables under consideration, validating the use of fixed effects to account for such correlations effectively.

The main results for the impact of climate change exposure and climate risk management on corporate financial performance are provided in

Table 5. Determinants of corporate financial performance (ROA).

	(1)	(2)	(3)	(4)
	All Firms	Coastal Area	Top 25% GDP per Capita Area	Top 50% GDP per Capita Area
Variable	Dependent: ROA
Climate change factors (L = 1)
Exposure	−0.416	−1.132	−2.881 **	−2.262 **
	(0.705)	(1.245)	(1.202)	(1.084)
Management	−0.244	0.0860	−2.579 ***	−0.863
	(0.264)	(0.462)	(0.854)	(0.562)
Exposure*GDP per capita 3	0.000	0.000	0.000 ***	0.000 ***
	(0.000)	(0.000)	(0.000)	(0.000)
Management*GDP per capita	0.000	0.000	0.000 ***	0.000 *
	(0.000)	(0.000)	(0.000)	(0.000)
Macroeconomic factors (L = 1)
GDP per capita	0.000	0.000	0.000	0.000
	(0.000)	(0.000)	(0.000)	(0.000)
COVID-19 contingency index	0.016 ***	0.018 ***	0.015 ***	0.014 ***
	(0.003)	(0.005)	(0.005)	(0.004)
Urban population ratio	27.800 **	−9.436	−89.990	−12.870
	(12.070)	(17.310)	(91.540)	(20.290)
Firm-specific factors (L = 1)
Total asset	−0.521	1.184 *	1.465 **	1.168 **
	(0.433)	(0.636)	(0.603)	(0.527)
Revenue growth	0.013 ***	0.013 ***	0.011 ***	0.010 ***
	(0.002)	(0.002)	(0.002)	(0.002)
Financial leverage	−1.048 ***	−1.431 ***	−1.450 ***	−1.382 ***
	(0.162)	(0.206)	(0.185)	(0.174)
Firm age	−0.923 ***	−0.721 ***	−0.760 ***	−0.869 ***
	(0.187)	(0.279)	(0.291)	(0.237)
Constant	11.000	22.140 **	95.990	30.350 *
	(7.421)	(10.510)	(77.800)	(15.490)
Observations	2515	1408	1333	1584
R-squared	0.064	0.078	0.091	0.082
Number of firms	176	97	96	113

Note: ¹ All independent variables are lagged by one period to mitigate against endogeneity concerns. ² Standard errors in parentheses. ***, **, and * denote p < 0.01, p < 0.05, and p < 0.1, respectively. ³ To delve deeper into the differential sensitivity of corporate financial performance to climate factors based on the economic context of the region, we augment our baseline specification with interaction terms of climate factors (climate change exposure and climate risk management) with GDP per capita.

. In addition to the baseline estimation across all firms, we test specifications based on sub-panels of firms in coastal areas, the top 25% GDP per capita areas, and the top 50% GDP per capita areas.

From Table 5, it is apparent that the impact of firms’ climate change exposure and climate risk management on corporate financial performance is not statistically significant, implying that climate change factors do not affect a firm’s financial performance in the short run, that is, with a lag of one quarter. Drawing on the literature, it is commonly understood that the duration horizon may be longer, with some studies indicating that it could take around two years for financial performance to be affected (Hang et al. 2019; Hart and Ahuja 1996). As an alternative approach, we explore a regression wherein the climate change variables are lagged by two years, while other variables are still lagged by one period. The regression results of the alternative specifications of the baseline are presented in

Table 6. Impact of climate change on firm performance over a longer time horizon.

	(1)	(2)	(3)	(4)
	All Firms	Coastal Area	Top 25% GDP per Capita Area	Top 50% GDP per Capita Area
Variables	Dependent: ROA
Climate change factors (L = 8)
Exposure	−3.378 **	−5.453 **	−8.583 ***	−7.174 ***
	(1.504)	(2.521)	(2.654)	(2.157)
Management	0.029	−0.175	−2.558	−0.601
	(0.400)	(0.721)	(1.868)	(0.970)
Exposure*GDP per capita 3	0.000 ***	0.000 **	0.000 ***	0.000 ***
	(0.000)	(0.000)	(0.000)	(0.000)
Management*GDP per capita	0.000	0.000	0.000	0.000
	(0.000)	(0.000)	(0.000)	(0.000)
Macroeconomic factors (L = 1)
GDP per capita	0.000	0.000	0.000	0.000
	(0.000)	(0.000)	(0.000)	(0.000)
COVID-19 contingency index	0.015 ***	0.019 ***	0.020 ***	0.013 **
	(0.004)	(0.005)	(0.007)	(0.005)
Urban population ratio	26.440	−15.260	−578.800	−31.130
	(23.430)	(31.330)	(362.900)	(46.820)
Firm-specific factors
Total asset	−0.793	1.875	0.359	0.483
	(0.729)	(1.251)	(0.922)	(0.818)
Revenue growth	0.013 ***	0.015 ***	0.011 ***	0.010 ***
	(0.002)	(0.003)	(0.003)	(0.003)
Financial leverage	−0.580 ***	−0.779 ***	−0.723 ***	−0.686 ***
	(0.222)	(0.299)	(0.279)	(0.259)
Firm age	−0.924 ***	−1.290 **	−0.831	−0.852 *
	(0.339)	(0.533)	(0.552)	(0.484)
Constant	16.700	37.560 *	537.600 *	52.860
	(15.710)	(21.050)	(319.100)	(38.250)
Observations	1517	853	798	952
R-squared	0.054	0.070	0.058	0.053
Number of firms	173	96	94	111

Note: ¹ Climate change variables are lagged by 2 years, and other independent variables are lagged by one period to mitigate against endogeneity concerns. ² Standard errors in parentheses. ***, **, and * denote p < 0.01, p < 0.05, and p < 0.1, respectively. ³ To delve deeper into the differential sensitivity of corporate financial performance to climate factors based on the economic context of the region, we augment our baseline specification with interaction terms of climate factors (climate exposure and climate risk management) with GDP per capita.

.

The results from Table 6 show that firms’ climate change exposure has a statistically significant (at the 95% level of significance) and negative impact on corporate financial performance, which is in line with the research by Cevik and Miryugin (2023). The estimated coefficients for climate change exposure exhibit a greater magnitude in coastal and higher-income provinces, suggesting a more pronounced adverse effect on firms’ financial performance within coastal areas and provinces with higher income per capita. This implies that firms situated in coastal areas and provinces characterized by higher income per capita experience a disproportionately larger decline in financial performance attributable to climate change exposure. The observed disparity in the impact of climate change exposure on financial performance, with greater significance discerned in coastal and higher-income provinces, underscores the intricate interplay between regional economic dynamics and environmental vulnerabilities within the context of climate change. Coastal provinces, characterized by their heightened susceptibility to climate-related risks due to factors such as their economic dependence on maritime trade, urbanization patterns, and exposure to extreme weather events, exhibit a more pronounced sensitivity to shifts in climatic conditions. Concurrently, higher-income provinces, typically endowed with greater resources and infrastructure resilience, may nonetheless manifest heightened sensitivities to climate change impacts owing to their complex economic interdependencies and infrastructural dependencies on coastal assets.

However, the impact of climate risk management is not significant. The climate change exposure score incorporates the actual environmental performance of firms related to GHG emissions, energy consumption, food security, agricultural sustainability, and access to affordable, reliable, sustainable, and modern energy. The climate risk management score, however, measures the firm’s commitment to climate change mitigation and adaptation and includes the existence of a climate change policy, the integration of climate considerations into business strategies, the implementation of emission reduction initiatives, and the level of transparency in reporting climate-related information. Thus, a firm’s vulnerability and exposure to climate change negatively impact firms’ financial performance. In contrast, the commitment of firms to climate change mitigation and adaptation has no significant impact on financial performance. The lack of significance in the climate risk management measure could be related to duration effects, whereby such impacts on firm performance could take longer to materialize. Moreover, the effort of one firm may be too small to bring about a reduction in GHG emissions and hence the mitigation effect. For this mitigation, the efforts of all the firms across the world are needed.

The finding of a significant and robust effect of exposure to climate change on firms’ ROA over time implies that such risks need to be more comprehensively incorporated into the investment strategies of firms, including through enhanced climate risk hedging and insurance mechanisms. This can also help to reinforce firms’ commitments to actions aimed at reducing climate change risks and exposures, especially for firms located in coastal areas and higher-income provinces.

Surprisingly, this study found that COVID-19 had a positive impact on the ROA of publicly listed companies in the PRC. This may be attributed to the PRC’s implementation of strict and early containment measures, which allowed factories to continue operating. Notably, from late 2020 to 2021, many orders were redirected to the PRC as other countries were significantly affected by COVID-19.

4. Conclusions and Policy Implications

With increasing GHG emissions, climate change will accelerate and worsen, resulting in loss of life and property. Hence, it is imperative to foresee and comprehend the impact of climate change risks on economic activity. Utilizing a quarterly firm-level dataset from the PRC over the period Q1 2018–Q2 2022, this paper estimated the impact of firms’ exposure to and management of climate-related risks (such as commitment to climate change mitigation, adaptation, and disclosure practice) on their financial performance.

The current study highlights two findings that have crucial policy implications. First, firms’ exposure to climate change has a detrimental impact on their financial performance. However, the effect is statistically significant only over a longer time horizon. Conversely, the impact of climate risk management on firm performance is not statistically significant at all. This result could arise because the commitments made by firms to climate change mitigation and adaptation and disclosure practices (such as the corporate climate change policy, the integration of climate considerations into business strategies, the implementation of emission reduction initiatives, and the level of transparency in reporting climate-related information) may be outweighed by the effects of exposure that are negative or not sufficiently material to be reflected in firms’ financial performance.

Second, the negative impact of climate change exposure on financial performance is relatively stronger for firms located in coastal areas and higher-income provinces, which are pivotal contributors to the PRC’s GDP output. The key message from our findings relates to motivating firms to take climate action, which would boost their financial performance and help contribute to achieving broader global goals in the transition to net-zero carbon emissions and sustainable development. Given the significant economic contribution of coastal regions, it is imperative to implement targeted measures to counteract the adverse effects of climate change vulnerability in these areas. Policymakers should prioritize initiatives aimed at enhancing climate resilience, promoting sustainable development practices, and investing in infrastructure to mitigate the economic risks posed by climate change in coastal regions. Additionally, fostering innovation and technology adoption can help to bolster the resilience of coastal economies and facilitate their transition to a low-carbon and climate-resilient future. By overcoming the unique challenges faced by coastal areas, policymakers can safeguard their economic prosperity and promote sustainable development in these critical regions.

The lag with which climate exposure affects firm performance implies that firms must be forward-looking and proactive in their efforts to alleviate their exposure to climate change. While climate-related events may not have detrimental impacts on firms’ ROA in the short term, complacency in taking affirmative action should be avoided. As climate-related exposure affects firm performance through macroeconomic and related channels, taking time to materialize, a longer-term perspective on incorporating climate risks into business models will be key. This is particularly the case for firms in coastal and more affluent provinces.

Finally, other specific measures should aim to invest in capacity building and knowledge transfer initiatives that can help firms to understand and address better the implications of climate change for their financial performance, fostering resilience and adaptation within the business sector. These measures collectively aim to mitigate the negative impacts of climate change on corporate financial performance and build resilience against future climate change risks.

A key limitation is that the data only include publicly listed companies, which are typically large firms. China also has numerous small, non-listed companies that are not covered in this study. Future research may expand the sample size to include these smaller firms for a more comprehensive analysis. A sufficiently large sample enables us to conduct more practical and detailed studies across different industries.