Environmental policies and firms'financial performance and risks : Is the environmental score of European firms a tool for financial risk mitigation and financial performance improvement after the heatwaves of August 2022?

Abstract

Worldwide global warming catastrophes have devastating impacts on regions, with increased frequency and intensity. Consequently, businesses, including financial markets, are affected by these disasters. Existing literature has examined the role of Environmental, Social, and Governance (ESG) policies in enhancing firms' stability. This study focuses on the impact of environmental policies on financial indicators of firms during the post-disaster period, specifically analysing the heat waves of August 2022. The objective is to explore the potential benefits of robust environmental policies in improving financial performance and reducing risks for companies facing significant increases in abnormal temperatures. To assess this, a net environmental index was developed to capture the performance of environmental policies, classifying firms into two samples: low and high-index enterprises. The study encompasses a broad sample of European public companies, incorporating financial risks, performance metrics, economic sectors, and environmental scores. A difference-in-differences model was employed to regress financial data on the index, mitigating potential issues of reverse causality commonly associated with empirical ESG studies. The main findings suggest that firms with a high index experience lower systematic risk and higher year-to-date returns in the post-heatwaves period. However, other regressed variables did not exhibit significant associations with the environmental policy suggesting having a strong index after the heat waves is not improving firms’ performance and risk mitigation. These findings partially support the hypothesis that firms with a high index demonstrate greater resilience during disruptive temperature events. However, due to the limitations of relying on data from a single database and the study's restricted time interval, the conclusions drawn are not comprehensive enough. Future research should expand the time frame to account for the increasing global warming trend, include a broader range of databases covering overall market ESG ratings, and incorporate more detailed metrics underlying the three attributes of the index. These avenues of investigation hold promise for providing more significant evidence regarding the importance of environmental regulations for financial corporations' well-being.