Weathering the Storm: Unravelling the Influence of Climate Change Risk Exposure on Firms’ Human Capital Investment

Abstract

Building on agency theory, this study examines the impact of climate change risks on corporate investment in human capital as a key factor of production. Using a sample of US listed firms for the period 1989–2017, we find that firms respond to the growing climate risks by enhancing efficiency in human capital investment, primarily through a reduction in over-hiring, consistent with our conjecture that firms adopt more prudent and efficient recruitment strategies in reaction to higher climate risks. Cross-sectional analyses suggest that such an improvement in human capital investment decisions is more salient for firms with poor corporate governance, less intellectual capital and facing greater industry competition and less pronounced for firms with more resilient assets against climate change. By exploiting two exogenous events that cause significant increases in climate risk as quasi-natural experiments, we conduct difference-in-differences analyses and find consistent evidence that the firms engage in more efficient human capital investment in response to both the physical and regulatory risks of climate change. Collectively, despite the overwhelming negative impact of climate change, our study reveals that such risks can play a disciplinary role in promoting more efficient managerial decisions on human capital investment.