Carbon Management Ability and Climate Risk Exposure: An International Investigation

Abstract

Using a large international sample of firms, we examine the relation between carbon management ability (CMA) and firm-level climate risk exposure. We find that CMA is negatively associated with climate risk exposure. More importantly, we show that firms with high-CMA managers tend to develop high-quality carbon management systems, undertake eco-innovations, and adopt transparent carbon reporting strategies to mitigate climate risk exposure. Cross-sectional analyses indicate that the negative association between CMA and climate risk exposure is stronger for firms in carbon-intensive sectors and firms that exhibit low environmental performance. Further, we reveal that CMA exerts a greater influence on climate risk exposure in stakeholder-oriented countries and in countries that have signed the Paris Agreement. Finally, we reveal that firms with high-CMA managers tend to have better financial performance, suggesting that hiring high-CMA managers may help firms achieve both financial and nonfinancial goals in transition to carbon neutrality.

Keywords: carbon management ability, climate change exposure, international study, CDP, financial performance