When climate risk hits corporate value: The moderating role of financial constraints, flexibility, and innovation

Abstract

• Climate risk exposure reduces firm valuation. • Asian firms face higher climate risk than European and North American firms. • Financial flexibility and R&D buffer the negative relationship between firm climate risk and value. This study examines the relationship between firms’ exposure to climate risk and their market value using global data from 2002-2022. A significant negative relationship between climate risk and firm value is identified, with geographic variation in impact severity. Asia faces the highest risk, followed by Europe, North America, and others. Policy events like the Stern Review and the Paris Agreement influence this relationship. Financial constraints exacerbate the negative effects of climate risk, while financial flexibility and R&D mitigate them. Firms in environmentally sensitive sectors and outside the United States are more vulnerable, and non-G20/non-OECD countries face greater climate challenges.