The impact of climate risk on corporate innovation: An international comparison

Employing an international sample of 10,012 firms across 62 economies spanning 2005-2017, we show that climate risk is negatively associated with corporate innovation activities. This finding is consistent with increased managerial risk aversion when managers perceive higher climate risk, leading to lower innovativeness. Through risk-buffering mechanisms, the negative association is weaker when firms are not subject to financial constraints, when corporate governance is stronger, and when the economy is more developed. Through risk-sharing mechanisms, better equity market development, greater trade openness, and greater insurance coverage can help mitigate the negative impact of climate risk on corporate innovation. Further analyses suggest that firms respond to climate change by inventing more green patents. Our study has implications for how to motivate corporate innovation in high-climate-risk economies.