Does firm-specific political risk exacerbate climate change exposure? Insights from a text-based analysis

Abstract

Purpose – This study aims to examine the effect of firm-specific political risk on climate change exposure, focusing on how political risk exacerbates climate vulnerabilities, particularly through regulatory uncertainties. Design/methodology/approach – The research uses a text-based analysis, employing metrics derived from advanced textual analysis and machine learning algorithms. A large sample of US firms is analyzed to assess the impact of political risk on climate change exposure. Various robustness checks, including propensity score matching, entropy balancing and instrumental-variable analysis, are conducted to ensure the reliability of the findings. Findings – The results demonstrate that higher political risk leads to greater climate change exposure, particularly in the context of regulatory risks. In addition, the study reveals that climate change exposure driven by political risk negatively affects firm value, indicating that political instability undermines market valuations by increasing climate-related vulnerabilities. Practical implications – The findings carry several important implications for corporate managers, investors and policymakers. Managers should integrate political risk assessment into their climate risk management frameworks, strengthening governance and investing in adaptive capabilities such as R&D to mitigate vulnerability. Investors should evaluate firms’ political and environmental risk exposures jointly, as political instability can amplify climate-related risks and depress firm value. For policymakers, the results highlight the importance of regulatory stability and policy coherence to encourage sustained corporate investment in climate resilience. A predictable policy environment can reduce uncertainty, promote long-term planning and enhance overall market confidence. Originality/value – This research contributes to the literature by examining the effect of firm-specific political risk on climate change exposure, using innovative text-based metrics. The study provides new insights into how political risks exacerbate climate vulnerabilities and impact firm value, highlighting the need for integrated risk management strategies that address both political and environmental challenges.