Turning Risk into Responsibility: Firm-Level Evidence on Climate Risk and ESG Performance in China

With the increasing climate risk and the expanding investment demand of enterprises for sustainable projects, enterprise managers have to carry out more environmental, social, and governance (ESG) practices. This research utilizes data spanning from 2008 to 2021 from China-s A-share enterprises and employs a bidirectional fixed-effects model to explore how climate risk affects corporate ESG performance. The findings demonstrate that climate risk significantly improves firms’ ESG performance in response to external environmental challenges. Further evidence shows that internal green technology innovation and external pollution discharge permits can strengthen this positive impact. In addition, this effect is heterogeneous and firms need to scientifically identify different types of climate risks, focusing on chronic and transitional risks. We further discover that the beneficial influence of climate risk is particularly pronounced in non-resource-based cities and state-owned enterprises. These findings provide firm-level evidence on how climate pressures can be transformed into sustainable action.