Climate Risk Management Skill: Measurement and Response to Firm Performance

This paper presents the construction of a new measure of climate risk management skill (CRMS) that captures a five‐level ability to improve firm outcomes by effectively managing climate risk factors. CRMS is constructed by aggregating standardized residuals from firm performance, firm efficiency, operating cash flow, capital expenditures, and financial distress, each controlling for firm and climate risk attributes, resulting in a composite index that isolates the value‐added component of managerial skill in climate risk‐sensitive domains. The author employs a battery of tests (including construct validity, convergent validity, and predictive validity) to validate CRMS: It loads significantly onto a single latent factor in confirmatory factor analysis and convergent test. It predicts future firm performance proxied by profitability and environmental scores. The authors also conduct robustness checks to confirm the stability of CRMS across economic cycles and industry risk profiles. The new measure contributes to the emerging literature by providing a climate risk capability‐based metric that explains heterogeneity in decision‐making, strengthens predictions of firm performance and climate risk outcomes, and complements existing measures of managerial ability.