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Climate change and financial performance

Student thesis: Doctoral Thesis

  • Panagiotis Tzouvanas
The late 20th and the early 21st centuries are characterised by significant changes to weather patterns. A growing number of environmental
initiatives have been activated to harmonise this phenomenon, which has taken monstrous magnitude mainly thanks to the continuing increase in carbon dioxide emitted by firms. Social and regulatory forces push firms to adopt a friendly, towards the environment, behaviour. In turn, firms have to be prepared with adequate tools and knowledge about the potential climate change effects on their financial performance. These effects can be direct such as extreme weather events (heat waves, storms, etc.) and indirect such as environmental regulations. Amid climate change crisis, this thesis presents three empirical investigations on how climate change has affected the financial performance. Particularly: (i) \do environmentally performing firms gain financial benefits?" (ii) \does reporting environmental information ease investors' concerns?" and (iii) \can variations of temperature destabilise the financial system"?
To be more specific, the first empirical chapter investigates the impact of environmental performance on financial performance. It is argued that both environmental and financial performance follow a non-linear endogenous relationship. Using data for 288 European manufacturing firms over the period 2005-2016, the said relationship is investigated under the financial slack argument and the contrasting paradigms of neoclassical and the instrumental stakeholder theory. Employing a quantile regression framework enriched with a set of instrumental variables to more effectively approximate environmental performance, the study finds (i) firms with superior environmental performance tend to be more protable; (ii) the relationship between environmental and financial performance can be characterised as positive and heterogeneous across the conditional distribution; (iii) financial and environmental performance are endogenously related only when high profitability firms are examined.
The second empirical chapter analyses the impact of environmental disclosure on the idiosyncratic risk of European manufacturing firms. Utilising a panel data set of 288 firms covering the period from 2005 to 2016 in 17 European countries, the study provides evidence that environmental disclosure reduces risk asymmetrically. Findings further show that this relationship can best be justified by the slack resource argument, as well as, by both the stakeholder and the legitimacy theory. By contrast, predictions based on managerial opportunism appear to be invalid. In addition, results reveal that the reaction of idiosyncratic risk to environmental disclosure is highly heterogeneous throughout the conditional distribution. At the same time, we cannot establish a strong link between environmental disclosure and rm's total risk, implying that environmental activities are closely linked to idiosyncratic risk. Results remain robust under all different specifications suggested by three different econometric methods; namely, (i) panel data techniques, (ii) dynamic panel data and (iii) quantile regressions.
The third empirical chapter examines if temperature has an effect on the systemic risk of European firms. We employ a ΔCoV aR model in order to measure the potential impact of temperature fluctuations on systemic risk, considering all companies from the STOXX Europe 600 Index, which covers a wide range of industries for the period from 1/1/1990 to 29/12/2017. Furthermore, in this study, we decompose temperature into 3 factors; namely (i) trend, (ii) seasonality and (iii) anomaly. Findings suggest that, temperature has indeed a significant impact on systemic risk. In fact, we provide significant evidence of either positive or nonlinear temperature effects on financial markets, while the nonlinear relationship between temperature and systemic risk follows an inverted U-shaped curve. In addition, hot temperature shocks strongly increase systemic risk, while we do witness the opposite for cold shocks. Additional analysis shows that deviations of temperature by 1ºC can increase the daily Value at Risk by up to 0.24 basis points. Overall, higher temperatures are highly detrimental for the financial system. Results remain robust under the different proxies that were employed to capture systemic risk or temperature.
Climate change has profoundly shaped the modern view of finance. This thesis examines the prominent role of climate change in financial markets and provides important implications suggesting managerial decisions, recommending policy-making directions, understanding theoretical connections between environment and profitability and providing optimal investment decisions.
Original languageEnglish
Awarding Institution
Award dateSep 2019


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