Reluctant participants? Weather extremes and ESG inconsistencies

Despite evidence suggesting that Environmental, Social, and Governance (ESG) disclosures can enhance financial performance, full corporate engagement in ESG activities is often hindered by conflicting stakeholder interests. This study seeks to better explain this paradox by examining the varied impacts of exogenous weather extremes on distinct ESG dimensions and overall financial performance. Our findings indicate that water scarcity generally improves aggregate ESG scores, primarily by boosting environmental (E) and governance (G) performance, although it negatively affects social (S) performance. Conversely, extreme heat tends to produce the opposite effects, highlighting the complex and differentiated nature of corporate responses to various types of weather extremes. We propose two key mechanisms underlying these inconsistencies: 1) resource limitations compel firms to prioritize specific ESG aspects over others, and 2) heightened risk perceptions prompt firms to adopt precautionary financial strategies, which may, in turn, constrain ESG investments. Furthermore, our results underscore the potential efficacy of regulatory frameworks and incentive systems in mitigating such ESG inconsistencies when firms face climate-related challenges.