HKU Jockey Club Enterprise Sustainability Global Research Institute
World-Class Hub for Sustainability
Xia Li | Caroline Flammer
Climate Risk Exposure and Firms’ Climate Strategies
May 6, 2026
Key Takeaways
- Research Question: The study examines whether firms exposed to physical and transition climate risks adjust their strategic portfolio across climate mitigation, climate adaptation, and political engagement.
- Data and Method: Using a large panel of U.S. publicly listed firms from 2002–2021, the study combines data on climate risk scores, emissions records, climate target disclosures, and lobbying activities, and uses OLS regressions to estimate the relationships between climate risks and firm responses.
- Findings
- Firms facing greater climate risk exposure do not increase mitigation efforts. Instead, higher physical and transition risks are associated with smaller reductions in greenhouse gas emission (GHG) intensity and a lower likelihood of adopting ambitious targets such as science-based or net-zero commitments.
- Physical climate risk primarily triggers adaptation strategies, including investments that enhance operational resilience to extreme weather events.
- Transition climate risk for high-emission firms is associated with greater anti-climate political engagement, including lobbying against climate regulation and participation in anti-climate coalitions.
- Implication: Rising climate risks alone do not naturally induce or are associated with corporate mitigation. Instead, they may shift corporate resources toward short-term strategies, reinforcing the need for effective public policy and long-term corporate governance incentives.
Source Publication:
Li, X., & Flammer, C. (2025). “Climate Risk Exposure and Firms’ Climate Strategies.” SSRN Working Paper.
Background and Motivation
Climate change increasingly poses systemic risks to the global economy. Firms face not only the physical consequences of climate change—such as extreme weather events, rising temperatures, and supply-chain disruptions—but also transition risks stemming from the shift toward a low-carbon economy, including carbon pricing, regulatory changes, technological disruption, and evolving consumer preferences.
Despite the growing importance of climate risk, most research has examined corporate responses through a single strategic lens, focusing on either environmental performance or political engagement. Yet firms rarely respond to climate change through only one channel. Instead, they can deploy a portfolio of strategies that includes reducing emissions (mitigation), improving resilience to climate impacts (adaptation), or influencing regulatory environments (political strategies).
This study investigates how firm-level exposure to physical and transition climate risks shapes this strategic portfolio. In particular, it examines whether higher climate risk exposure motivates firms to intensify mitigation efforts or to prioritize other strategies aimed at protecting short-term interests.
Data and Methodology
The analysis is based on a comprehensive panel of U.S. publicly traded firms from 2002–2021, combining financial and climate-related datasets from multiple sources.
Physical climate risk exposure is measured using Trucost’s sensitivity-adjusted risk scores, which capture firms’ vulnerability to climate hazards such as flooding, water stress, and heatwaves. The authors proxy transition climate risk using firm-level greenhouse gas (GHG) emissions, which reflect exposure to potential regulatory, technological, and market adjustments associated with decarbonization.
This study uses two measures to evaluate corporate mitigation. The first captures changes in GHG emission intensity, and the second records whether firms adopt formal climate commitments such as science-based targets or net-zero pledges. Manual coding of CDP disclosures identifies adaptation activities, capturing the breadth of corporate actions designed to increase resilience to climate risks.
To examine political strategies, the study combines lobbying expenditure data from OpenSecrets with indicators of firms’ climate policy positions derived from legislative bill tracking, InfluenceMap scores, and CEO political donation records. These data distinguish between pro-climate and anti-climate political engagement.
Empirically, the study estimates OLS regressions with industry and year fixed effects, controlling for firm size, profitability, leverage, and other firm characteristics to isolate the relationship between climate risk exposure and corporate strategy.
Findings
The results reveal a striking pattern: greater exposure to climate risk is not associated with more mitigation efforts. Instead, firms facing higher levels of physical or transition climate risks exhibit smaller reductions in GHG emission intensity and are less likely to adopt ambitious climate targets.
Physical climate risk primarily drives adaptation strategies. Firms exposed to threats such as extreme weather expand investments in operational resilience. These investments include infrastructure upgrades, supply-chain diversification, and other measures designed to protect assets from climate shocks. However, these adaptation efforts often coincide with reduced emphasis on emissions reduction, suggesting a diversion of resources away from mitigation.
Transition climate risk triggers a different response. Firms with high emissions—and therefore greater exposure to regulatory or technological transition risks—are more likely to engage in anti-climate political strategies. These firms increase lobbying against climate legislation and are more likely to join coalitions opposing stricter environmental regulation. Although some of these firms disclose more general climate targets, they are less likely to commit to more demanding initiatives, such as science-based or net-zero targets that require substantial operational changes.
Quantitatively, the results indicate a one-standard-deviation increase in physical climate risk is associated with an approximately 2% decrease in the mitigation rate of GHG intensity. Similar negative relationships emerge for transition climate risk. These patterns remain robust across multiple specifications, including alternative climate risk measures, different climate scenario horizons, and the exclusion of energy sector firms.
Policy and Market Implications
The findings challenge the widely held assumption that increasing climate risks will naturally motivate firms to reduce their GHG emissions. Instead, when climate risks intensify, firms may prioritize strategies that address immediate operational or regulatory pressures rather than mitigation, which has long-term environmental and social impacts.
This behavior may generate a self-reinforcing cycle. As physical climate impacts intensify, firms may allocate more resources to adaptation, leaving fewer available for emissions reductions. At the same time, firms exposed to transition risks may attempt to delay regulatory change through political engagement. Together, these responses can slow progress toward decarbonization while increasing the likelihood of future climate shocks.
The study therefore highlights the importance of effective public policy in shaping corporate climate behavior. Regulatory frameworks that provide clear and credible incentives for emissions reductions may be necessary to counterbalance firms’ short-term strategic responses to climate risk.
For investors and market participants, the findings suggest firms with high transition risk exposure may not only face regulatory and technological disruptions but also actively engage in political strategies to delay policy change. Understanding these strategic responses is therefore essential for assessing both firm-level climate risk and broader systemic transition risks.