Impact of climate vulnerability on firm performance: A cross-country study

Abstract

The literature acknowledges the macroeconomic consequences of climate change, evolving conceptual thinking of vulnerability as a measurement of a country’s risk to climate change and a basis for action. However, research on the impact of climate change on firm performance is limited. This paper investigates the relationship between a well-known & free accessed vulnerability score developed by ND-GAIN and firm performance, including accounting and market measurement. Using a comprehensive panel dataset collected from Refinitiv Eikon for publicly listed firms in 96 countries (2001-2021) and from reliable country-level data sources, this study employs a multi-way fixed effect regression model with clusters to rigorously test hypotheses and ensure robust outcomes. Empirical findings indicate that firms in countries with higher climate vulnerability experience higher financial returns, although their market performance declines. Meanwhile, results from annual changes in vulnerability scores show negative impact on all performance indicators, but on statistically significance on ROA and EBITDA over total assets. Sectoral analysis indicates that sensitive sectors are heavily negatively affected by changes in country vulnerability rankings. This suggests that a country with an improving annual vulnerability score can enhance firms’ financial returns in that country, especially in environmentally sensitive sectors. Result implies that investors viewed vulnerability scores as a critical factor, negatively influencing market measures when making investment decisions.