Environmental Risk, Environmental Action, and Firm Value: Evidence From Climate‐Linked Contracts

ABSTRACT Based on a sample of public firms domiciled in 41 countries around the world, we find that firms facing a higher level of environmental risk are more likely to adopt climate‐linked contracts with quantitative targets. We also find that firms adopting climate‐linked contracts are more likely to take real actions to address their concerns about environmental risks. Finally, we present evidence suggesting that environmentally sensitive firms with climate‐linked contracts, particularly those involving real actions implemented after the adoption of such contracts, tend to have high firm value. Taken together, our results support the conjecture that effective climate‐linked contracting has a real and substantive impact on managerial decision‐making, which in turn reduces firms’ environmental risks and increases their value.