Research from York University’s Schulich School of Business shows companies are concerned about climate risk shifting investments in physical capital – assets such as property, plant and equipment (PPE) – at the expense of organizational capital assets that are less tangible, such as patents, brands and human resources.
The findings in the paper “Relationship between Climate Risk and Physical and Organizational Capital” are published in Management International Review. The study was based on an international sample of companies from 39 countries and is co-authored by Kiridaran (Giri) Kanagaretnam, accounting professor at the Schulich School of Business and the Ron Binns Chair in Financial Reporting, Banking and Governance; together with Gerald Lobo, the Arthur Andersen Chair of Accounting at the University of Houston’s C.T. Bauer College of Business; and Lei Zhang, a Schulich PhD graduate.
“With higher climate risk, investments tend to be directed to physical capital assets to become more climate-resilient at the expense of neglecting investments in organizational capital such as brand presence, employee development and product innovation,” said Kanagaretnam. “That’s significant because organizational capital is important for firms to maintain their strategic advantage in the medium and long term.”
The main findings show climate risk is positively associated with physical capital but is negatively related to organizational capital. The study explores the effects of climate vulnerability on these relationships and found that the positive relationship between climate risk and physical capital is mainly driven by climate-nonvulnerable industries, while the negative relationship between climate risk and organizational capital is principally driven by climate-vulnerable industries.
“Overall, our findings have significant implications for both domestic and multinational enterprises that engage in long-term investments against the background of climate change," said Kanagaretnam.
More information about the study is available online.