Nexus Between Climate Risk, Firm Performance and Firm Value: An Indian Perspective

Climate change poses significant risks to economic development, particularly in climate-sensitive economies like India. This study examines the relationship between environmental scores of Nifty50 companies, their financial performance, and stock prices, using panel data from financial year 2017 to 2022. Environmental scores highlight physical and transition climate risks, while firm-level indicators such as return on equity, return on assets, and Tobin’s Q measure performance and value. An event study was conducted to examine stock price movements during three key events: the CRISIL ESG-score release (May 2022, firm-specific), India's submission of its long-term low-emission strategy (November 2022, macroeconomic), and the Union Budget announcement (February 2023, macroeconomic). The analysis combines fixed effects panel regression with event study methodology using cumulative abnormal returns to identify both firm-level financial impacts and market responses. Findings reveal that firms with stronger environmental scores tend to demonstrate better financial performance and receive more favorable investor responses during climate-related announcements. Tobin’s Q peaks among firms in the ‘Strong’ environmental-score category, indicating that a balance between environmental commitment and profitability may be optimally rewarded. This research reinforces stakeholder and signalling theories, showing that environmental responsibility enhances competitiveness and long-term value. It offers novel insights and valuable guidance to policymakers, investors, and corporate leaders navigating climate-related financial decisions.