The impact of temperature increase on firm profitability. Empirical evidence from the European energy and gas sectors

Abstract

Although temperature change is affecting economic activity, there are a few empirical studies on how it influences firm performance. Using panel data of 147 European listed firms active in the energy and gas sectors over the period 2009–2016, this study aims to analyze the impact of temperature change on firm profitability while controlling for firm-specific and energy market-related factors. The results of the quantile regression approach show that an increase in the annual temperature has a positive impact on firm profitability. However, this impact varies at different quantiles of the profitability distribution. A 1℃ degree increase in temperature is related to a 1.30% increase in operating profitability for the most profitable firms (Q90). However, the magnitude of this impact is lower for less profitable firms (Q10 and Q25). The empirical results revealed that cash flows, market opportunities, leverage, firm size, net asset turnover, as well as market concentration and energy prices, have a significant influence on firm profitability in the energy and gas sectors. These findings appear to be robust to several control variables and robustness tests. The study provides empirical evidence on the impact of climate change on the performance of firms active in climate-sensitive sectors (such as energy and gas sectors). The findings of this study are particularly helpful for portfolio risk managers, energy traders, and policymakers.