How do firms respond to climate change? Evidence based on ESG performance

Abstract

Climate change has become an unavoidable external force influencing firms' operations by reshaping policy environments and raising societal expectations. As a result, firms are compelled to adopt measures to address these challenges. This study examines the causal relationship between climate change and firms' ESG (Environmental, Social, and Governance) performance using data from Chinese manufacturing firms listed between 2009 and 2021, while controlling for firm-specific and climate-related factors. The findings reveal that temperature deviation (TD) significantly improves firms’ ESG performance, a result that remains robust across various tests. Moreover, TD enhances ESG performance primarily through reputation and costs channels, with stronger effects observed in firms with low reputations compared to high-reputation firms, and in high energy-consuming firms compared to those with low energy consumption. This study offers a novel perspective on how climate change impacts firms at the operational level and provides actionable recommendations for governments to support and promote improved ESG performance.