# 5 Discussion and conclusion

In this research, we present a unique dataset merging firm-level financial statements with weather data to explore how climate change uncertainty affects firm investment behavior. Using financial records from 64 countries from the Orbis database and daily surface temperature data on a 1x1 grid from BEKREARTH, we created a comprehensive grid-level dataset. This dataset integrates firms’ fixed asset growth with temperature uncertainty.

A key objective of this study is to provide grid-level evidence on the impact of temperature uncertainty on firms’ fixed asset growth. Our findings showed a strong negative association between temperature uncertainty and firm growth.

Several factors could explain this significant negative relationship. First, temperature uncertainty introduces additional complexity into firms’ operational and strategic planning, making it harder to forecast costs and returns on investment accurately. Firms might reduce or delay capital investments as they become uncertain about the economic viability of long-term projects, especially when faced with unpredictable climate conditions.

Moreover, temperature uncertainty may also raise firms’ operating costs, particularly in sectors dependent on stable climatic conditions, such as manufacturing, energy, or logistics. For instance, unpredictable fluctuations in temperature could affect energy consumption, maintenance costs, or supply chain efficiency, all of which contribute to a more cautious approach to capital expenditures. Firms may allocate fewer resources to expanding fixed assets if they expect higher variability in operational expenses due to environmental uncertainties.

We also documented significant heterogeneity in the impact of temperature uncertainty on firm growth across industries. Industries with higher levels of irreversible assets, as measured by the ratio of tangible fixed assets to total assets, tend to experience a more pronounced negative effect from temperature uncertainty. This result aligns with the pediction by ROT (Myers 1977, Baldwin 1982), which suggests that firms with more irreversible investments are more likely to delay or reduce their investment activities in response to uncertainty. To be more specific, firms in those sectors with high proportion of irreversible assets typically face high sunk costs, making it difficult to adjust or reverse investments once they are committed. As a result, the temperature uncertainty increases the risk of making suboptimal investment decisions, leading firms to adopt a more cautious stance. Second, capital-intensive industries often require longer planning horizons for investment projects, which can exacerbate the impact of uncertainty. The unpredictability of future environmental conditions makes it harder for firms to commit to long-term investments when they are unsure how future conditions might evolve.

Finally, our study revealed that the impact of temperature uncertainty on firm growth varies significantly across income levels. High-income countries are more adversely affected by weather uncertainties in terms of firms’ size growth. It is important to note that there is no general consensus on how income levels influence the impact of weather on economic activities, as different studies use varying metrics. For example, while Donadelli et al. (2022) focus on the growth rate of total factor productivity and find the negative effects of temperature variability more pronounced in high-income countries, Kotz et al. (2021) use GDP per capita growth and find that lower-income countries are more negatively affected.

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