Physical climate risks and investment behaviour, the role of cultural differences

Abstract

This research explores the impact of severe physical climate risks on corporate investment decisions and outcomes, focusing on the role of cultural differences in shaping this relationship among emerging economies. Using a sample of 308,451 firm-year observations across 51 countries covering 2007 to 2019, we find that physical climate risks significantly reduce investment efficiency. Our analyses of cultural differences show that firms in hierarchical cultures adopt more conservative investment approaches, limiting adaptability to climate challenges, while firms in risk-averse cultures proactively integrate climate risks, leading to better investment efficiency. A difference-in-differences analysis further shows that the Paris Agreement led to modest short-term improvements in climate-related investment responses, though longer-term challenges remain. These findings highlight the importance of incorporating cultural context into policy and corporate governance strategies to enhance climate resilience. For robustness, we use System-GMM estimation, helping to account for potential endogeneity and dynamic firm-level factors.