Climate change, technological innovation, and firm performance

Abstract

There is substantial evidence that firms are adversely affected by climate risk. At the same time, technological innovations have been fast advancing. It is unknown how much of the negative effect of climate risk is neutralized by the positive effect of country-level technological innovations. Using the global climate risk index (CRI) and the information technology emanated from exports, we examine whether technological innovations can mitigate adverse effects of climate risk on firm performance and investment policy. We interact country-level innovation with CRI for 46 countries over the period of 2011–2018. We find statistically and economically significant evidence supporting the hypothesis that technological innovations mitigate climate risk's adverse effect on firm performance. We attribute this finding to firms that are in high innovation countries, and posit that such firms have more confidence towards the future, thus enabling them to be less concerned about climate risk.