Does rising mercury also make for rising bank balances? Research led by Professor Dimitrios Gounopoulos examined the link between increasing temperatures and the size of cash reserves held by firms.

“Temperature affects economic risk, productivity and financial constraints, which in turn influence liquidity needs,” explains Dimitrios.

He continues: “Higher or more extreme temperatures increase uncertainty by disrupting production and raising operating costs, leading firms and households to hold more cash as a precautionary buffer.”

The study took data from publicly listed US firms from 2001-2021, and calculated the long-term average temperature trends for the counties in which these firms’ headquarters are based. The researchers then modelled these trends against the companies’ cash holdings – measured as a ratio of cash to book assets.

What they found was a strong positive association between upwardly trending temperatures and cash reserves. In fact, average temperature rises of one standard deviation led to cash holdings increasing by just over 3%.

What’s more, in firms facing greater financial constraints – whether due to smaller size, younger age or lack of access to credit – the effect is even more pronounced, likely due to the relative precarity of their situation.

Firms’ exposure to climate change comes in multiple forms – including physical risks, regulatory risks and, conversely, opportunities. Pressure to react to this through ‘eco-innovation’ can come from both internal and external factors.

“Eco-innovation refers to a company’s ability to reduce environmental costs and impacts while creating innovations in environmental technologies and eco-friendly product or process designs,” explain Dr Pietro Perotti, Dr Fanis Tsoligkas and School of Management PhD student Kangding Wang.

They compared levels of eco-innovation – measured through metrics such as use of renewable energy and the development of sustainable products – with information from analysts and earnings conference calls indicating firms’ perceived exposure to climate change. They looked at data from 2002-2021 on US public firms.

Those facing higher levels of exposure were significantly more likely to demonstrate eco-innovation: an increase of one standard deviation in climate change exposure correlated to an almost 35% higher eco-innovation score.

Pietro, Fanis and Kangding conclude: “Our results suggest that firms facing higher climate change exposure are more committed to eco-innovation, and that institutional pressures encourage more proactive and comprehensive strategies for sustainability and long-term competitiveness.”

The impacts of extreme climate events are far-reaching. “They can severely disrupt agricultural productivity, depress labour income, impair human welfare, devalue financial assets and undermine corporate performance,” asserts Dr Lu Xing.

Lu is part of a team, alongside colleagues from Zhejiang University and Shenzhen University in China, that examined the impact of such events on the implied cost of equity capital (ICOC) – a forward-looking prediction of investors’ returns.

The researchers compared ICOC data from thousands of firms across 38 countries worldwide with these countries’ exposure to extreme climate events such as storms, floods and droughts. The data showed a significant positive correlation.

They believe this is due to increased operational volatility, information asymmetry and agency conflicts such as insider trading amid the markets facing such climate related catastrophes.

The effect, however, was less pronounced among companies whose income streams were spread across multiple countries – as this dispersion provides a buffer against shocks in a single territory – but more pronounced in climate-vulnerable industries such as agriculture or energy.

“In view of our findings, policymakers should improve climate risk disclosure and transparency to reduce uncertainty and increase information availability following extreme climate events,” suggests Lu.