Does climate risk impact firms' ESG performance? Evidence from China

Owing to its devastating nature, climate risk has become one of the top concerns of the world community. The literature on the effects of climate risk on environmental, social, and governance (ESG) performance is scarce. Using data from Chinese A-share listed firms from 2010 to 2019, this study aims to determine whether climate risk affects firms' ESG performance. The findings show that climate risk has a detrimental effect on the ESG performance of Chinese firms. A heterogeneity analysis shows that the negative effect of climate risk on firms' ESG performance is most pronounced for state-owned firms, growing and declining firms, and firms with more institutional investor shareholders. Furthermore, a mechanistic analysis shows that financing constraints, corporate diversification, and media attention enhance the negative effect of climate risk on ESG. In addition, after addressing several robustness checks and endogeneity issues, our conclusions remain valid. Thus, this study indicates the need to develop a comprehensive policy to achieve development goals by considering and valuing the impact of climate risk on firm's ESG performance.