Climate Change Risks and Financial Performance: Evidence from Listed Companies in Saudi Arabia

Abstract

Climate change has emerged as a critical external factor influencing firm performance, particularly in regions susceptible to extreme weather conditions. As environmental variability intensifies, firms operating in climate-sensitive sectors must understand how climate risks translate into financial outcomes. This study investigates the impact of key climate-related variables, including temperature, humidity, precipitation, and wind speed, on firm performance indicators, namely Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q (TBQ), using a panel dataset of firms listed on the Saudi Stock Exchange between 2010 and 2022 using two complementary econometric approaches: a fixed effects regression model and a dynamic panel Generalized Method of Moments (GMM) estimator. The fixed effects results reveal that precipitation and specific humidity negatively affect accounting-based performance, while relative humidity and wet-bulb temperature have positive effects on both ROA and ROE. Wind speed emerges as a significant disruptor, reducing both operational returns and market valuation. Tobin’s Q is less consistently affected, likely due to external market factors. The GMM results largely confirm these findings with improved statistical rigor, reinforcing the negative impact of rainfall and humidity and the positive effects of moderate temperature and humidity on firm performance. These findings carry substantial implications for policy makers and corporate leaders, particularly in the context of Saudi Arabia’s Vision 2030.