Nexus between Climate Risk, Firm Performance and Firm Value: An Indian Perspective
Authors: Asbe Chetana , Abhyankar Ameya 
Published: December 2024

Abstract

Purpose
India is a signatory to international agreements like the Paris Agreement, which emphasizes the need for countries to mitigate climate-related risks. India is highly vulnerable to the effects of climate change as its economic development is closely tied to climate-sensitive sectors. Therefore, its regulatory bodies and corporates are increasingly recognizing the importance of climate risk assessment. Investors are becoming more conscious of climate-related risks and their potential impact on companies' long-term financial performance. The aim of this study is to identify whether an association exists between the environmental score of Nifty50 companies and their financial performance and their stock prices.
Design
The dataset for our study focuses on Nifty 50 Index companies, with environmental scores from CRISIL that emphasize on climate risks. Company fundamentals from FY17 to FY22 were collected using Bloomberg data- ROE, ROA, EBIDTA, total assets, Tobin’s Q ratio, market capitalization, short-term and long-term debt, revenue and dividends paid. The event study utilized Yahoo Finance's closing stock prices for three time series: April 2022–June 2022 (announcement of CRISIL ESG Score), October 2022–December 2022 (India’s presentation of its long-term strategy for low-emission development to the UNFCCC), and January 2023–February 2023 (announcement of Union Budget 2023-24).
Findings
Data collected and analyzed from FY17 to FY22 reveals that companies with lesser exposure to climate transition risks have been outperforming those with higher exposure in terms of metrics such as ROA, ROE, EBITDA, and Tobin’s Q ratio. Also, companies that implemented (or intended to implement) methods to address climate change challenges or comply with climate change policy requirements most likely experienced an improvement in their stock prices. Our study discovers that equities with a higher score provide investors with higher returns, which is consistent with the idea that firms’ stock prices do not accurately reflect underlying climate transition risk.
Research Implications
Our paper carries two major implications. First, it proposes a need for a broader distribution of data about the environmental performance of companies in India. As collectively, investors possess the capability to redirect capital from businesses that are especially vulnerable to climate change towards more robust alternatives (Wiklund, 2020), they must be made aware of the existing environmental scores and measures. Such dissemination would help stimulate appropriate motivations for directing financial assets towards climate change mitigation. Second, the E score data proves valuable in encompassing risk pricing, and in handling the impact of climate change risk on investor choices.
Originality
Numerous studies have been conducted for the U.S. and European regions, however, minimal evidence of investigation prevails for the Indian market. To the best of our knowledge, this study differs from previous empirical studies that have looked at climate change and its impact on the Indian financial market. This research corresponds with the work of Reboredo and Ugolini (2022), who investigated whether climate transition risk impacts the financial performance and cross-section pricing of listed US and European companies. Our study aligns with their findings and the results of similar literature on the effects of climate-related risks on the financial performance of companies.