Climate Risk and Financial Performance of Energy Companies - A Cross-Country Analysis

Abstract

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Climate change imposes greater physical, transitional, as well as regulatory risks, on the firm’s financial and operational activities. However, while evaluating the performance of the firms, the traditional financial performance indicators do not incorporate climate risk. Without integrating climate risk in the traditional performance indicators, the firms may be misleading the investors and other stakeholders by claiming higher achievement and better performance. Hence, this paper has tried to examine the firm’s performance after integrating climate risk with the traditional financial indicators. Our results provide evidence that climate risk significantly affects the financial performance of firms. More specifically, energy companies from developing countries are more exposed to climate risk, than those located in developed countries. The study also revealed that companies from the developed countries have generated a higher amount of revenue and profit, but they (except Australia) are not able to transfer the company’s methods of working to lower emissions production.

Keywords: Climate Risk, Integrated Ratios, Financial Performance, Energy Industry

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