Climate risk and green innovation-ESG disconnect: Firm-level evidence from China.

The inability to reliably quantify firms' climate change exposure has become a primary obstacle preventing academics from thoroughly investigating climate impacts on micro-organizations. In this study, we construct firm-level climate risk indicators using hand-collected data on meteorological factors and investigate whether and how climate risk affected the paradoxical relation between corporate green innovation and its' environmental, social, and governance (ESG) scores on the basis of the Chinese context. We document that the climate risk is significantly positively (or negatively) related to the negative (or positive) green innovation-ESG disconnect, implying that climate risk enhances the loose-coupling motives between green innovation and ESG for addressing internal efficiency and external legitimacy conflict. The above disconnect effect of climate risk, namely green innovation as compliance means and ESG as ends fail to complement each other as comparative advantages, is less pronounced for private-owned enterprises, firms with high corporate governance quality, and those with powerful CEOs. Furthermore, the disconnect effect of climate risk results in severe corporate performance volatility and diminishes future growth potential. Overall, this study contributes to the literature on climate risk at the micro level and offers initial evidence that climate risk causes means and ends cannot be mutually justified by demonstrating the green innovation-ESG disconnect, which has conducted few empirical research so far.