CLIMATE & FINANCE
Does Better Climate Performance Make Companies Less Risky?
Climate action is often discussed as a cost to business. But could companies that manage their carbon emissions better actually become less risky investments?
THE BIG IDEA
Our research finds that companies with better carbon performance experience lower equity risk. Strong climate governance matters too: companies that embed climate issues within their governance structures also tend to have lower risk.
But there is an interesting twist. When carbon performance and climate governance are considered together, their combined benefit is smaller than the sum of their individual effects. In other words, more of both does not necessarily produce proportionately greater reductions in risk.
WHAT WE STUDIED
342 companies
S&P 500
2009–2023
Study period
3 risk measures
Total, systematic and firm-specific risk
We measured companies’ carbon performance relative to their industry peers and examined a range of climate governance practices.
We then examined whether these factors were associated with three dimensions of equity risk.
WHAT WE FOUND
↓ LOWER CARBON RISK
Better carbon performance is associated with lower equity risk.
✓ GOVERNANCE MATTERS
Stronger climate governance is also associated with lower risk.
◎ MOSTLY FIRM-SPECIFIC
The effect is primarily on company-specific rather than systematic market risk.
↔ MORE ISN’T ALWAYS BETTER
When one dimension is already strong, strengthening the other provides smaller additional risk-reduction benefits.
WHY IT MATTERS
🏢 For Companies
The findings suggest that climate action is not simply an environmental responsibility. Effective carbon management and credible climate governance can also have financial benefits by reducing uncertainty surrounding the firm.
📈 For Investors
Both environmental performance and the way climate issues are governed provide potentially useful information when assessing company-specific risk.
🏛 For Policymakers
The evidence reinforces the case for encouraging substantive emissions reduction alongside credible corporate climate governance.
ONE IMPORTANT CAVEAT
Better climate performance cannot insulate a company from everything. The risk-reducing effects we identify relate principally to firm-specific risk. Economy-wide shocks, interest-rate movements, geopolitical events and other sources of systematic market risk remain largely outside an individual company’s control.
THE RESEARCH BEHIND THIS INSIGHT
THE PUBLISHED RESEARCH
Malafronte, I., Pereira, J. & Rakeeb, F.R. (2026).
Carbon Performance, Climate Governance, and Equity Risk.
International Journal of Finance & Economics
THE STUDY
342 Companies
S&P 500
2009–2023
Study period
Panel-data analysis
Fixed effects with additional robustness and endogeneity tests.