Environmental Risk, Environmental Action, and Firm Value: Evidence From Climate-Linked Contracts

Abstract

Based on a sample of public firms domiciled in 41 countries around the world, we find that firms facing a higher level of environmental risk are more likely to adopt climate-linked contracts with quantitative targets. We also find that firms adopting climate-linked contracts are more likely to take real actions to address their concerns about environmental risks. Finally, we present evidence suggesting that environmentally sensitive firms with climate-linked contracts, particularly those involving real actions implemented after the adoption of such contracts, tend to have high firm value. Taken together, our results support the conjecture that effective climate-linked contracting has a real and substantive impact on managerial decision-making, which in turn reduces firms’ environmental risks and increases their value.