The Green Chain: A Carbon Neutral Path from Climate Risk to Environmental, Social and Governance Performance

Abstract

Global climate change is increasingly recognized as a critical factor influencing economic performance, thereby making the Environmental, Social, and Governance (ESG) performance of businesses a vital indicator of sustainability. In the context of China's "dual-carbon" objective, this study examines the relationship between climate transition risk and the ESG performance of listed Chinese companies. Utilizing text analysis techniques, this research quantifies the Management Discussion and Analysis (MD&A) sections of annual reports from 2014 to 2019 to extract information on climate transition risks. A multiple regression analysis is then applied to assess the impact of these risks on companies' ESG performance. The findings indicate that climate transition risk has a measurable effect on the ESG performance of enterprises, suggesting its role as an incentive for achieving carbon neutrality. Specifically, the analysis shows that climate transition risk is associated with improvements in certain aspects of ESG performance, including environmental stewardship, social responsibility, and governance quality. Additionally, the study reveals that non-state-owned enterprises, those with diversified business strategies, decentralized management structures, and audits conducted by Big 4 firms, tend to exhibit better ESG performance in the face of climate transition risks. These results demonstrate the nuanced impact of climate transition risk on ESG performance, particularly within the framework of China's carbon reduction goals, and highlight the importance of firm characteristics in moderating this relationship. This evidence provides a foundation for stakeholders, including enterprises, policymakers, and investors, to consider climate transition risks in their efforts to enhance ESG performance.