Environment and Energy: Does climate risk shape the energy consumption behavior of firms?

Corporations play a central role in shaping any economy, and therefore, their response to a country's climate risk exposure needs to be studied. This paper presents the first empirical evidence of the relationship between climate risk and firms' energy consumption behavior using Indian firm-level data. The findings reveal that climate risk leads to a reduction in firms’' energy consumption, with a stronger impact in the post-Paris Agreement period, in non-affiliated firms, and in firms with efficient governance. Asymmetric analysis reveals that high energy-consuming firms are particularly affected, experiencing a more significant decrease. We also find that this negative impact gets magnified in an uncertain environment. The negative impact is especially pronounced in energy-intensive industries, where the need to reduce energy usage is greater. Additionally, firms that adopt energy-efficient practices are valued by investors. Our baseline result remains robust to multiple robustness checks. Overall, this study offers a comprehensive analysis of how firms adjust their energy consumption in response to rising climate risks, contributing valuable insights to the intersecting fields of climate finance and energy, particularly within a critical, developing economy highly exposed to climate risk.