Firm-specific climate change risk and environmental contracting

This paper investigates how firm-level climate risk exposure influences the adoption of environmental contracting in CEO compensation (E-contracting). We find that regulatory climate risk consistently emerges as the strongest predictor of E-contracting, particularly in states with weaker climate policies. Technological opportunities show no robust effect, while physical risk exhibits context-dependent patterns—negative in disaster-prone or policy-weak states but positive elsewhere. We also find that firms with prior social contracting (S-contracting) are significantly more likely to adopt E-contracting, indicating complementarity between the two forms of non-financial performance measures. Overall, the evidence suggests that E-contracting functions primarily as a regulatory-compliance response rather than a market-driven adaptation. The study contributes by identifying the specific climate-risk channel—regulatory risk—that most strongly shapes environmental incentive design in executive pay.