The dynamics of corporate climate risk and market volatility: International evidence

This study investigates the impact of firm climate risk exposure on market volatility, with a particular focus on the moderating roles of firm-specific and country-level characteristics. Using a comprehensive global panel of 38,808 firm-year observations across 54 countries from 2002 to 2023, we employ fixed-effects regressions, two-step GMM, and an instrumental variable approach to address endogeneity and unobserved heterogeneity. The analysis reveals that higher climate risk exposure is associated with significantly greater market volatility, reflecting investors’ heightened sensitivity to climate-related risks. Importantly, firm-level factors such as strong corporate governance, high R&D intensity, and strategic positioning are found to mitigate these effects. At the country level, weaker environmental policy frameworks and underdeveloped financial systems amplify climate-induced volatility, underscoring the role of institutional quality. We also examine the influence of major climate policy events such as the Paris Agreement and find evidence of a post-policy decline in volatility, suggesting increased investor confidence in global climate governance. Overall, this study contributes to the climate finance literature by offering novel insights into how both corporate strategies and institutional environments shape the financial consequences of climate risk, providing practical implications for firms, investors, and policymakers.