Purpose: This study investigates the dynamic trade-off between the short-term financial costs and long-term resilience gains of Environmental, Social, and Governance (ESG) initiatives among high-risk UK-listed firms. It critically assesses the sufficiency of current corporate risk models by introducing secondary, high-impact physical climate risks.
Design/Methodology/Approach: Utilizing a sample of UK firms over a 15-year period (2010–2024), we employ a dynamic panel data approach, specifically the System Generalized Method of Moments (GMM), to account for endogeneity and the temporal lag of ESG impact on firm performance (Tobin's Q, Cost of Debt). We further interact ESG with a measure of Physical Climate Risk Exposure (PCRE) and decompose the effects by E, S, and G pillars.
Findings: Results confirm a short-term financial drag, primarily driven by Environmental (E) expenditure, indicating a necessary cost of ESG investment. Crucially, we find a significant positive relationship between lagged ESG scores (3-5 years) and corporate value, with the Social (S) pillar emerging as the most sustained long-term value creator and resilience engine. The positive effect of ESG is significantly amplified for firms with higher PCRE. However, the analysis reveals that even robust ESG is challenged by the evolving threat landscape; for instance, the link between rising sea levels and increased seismic activity in coastal regions suggests that current predictive models are insufficient to capture these complex, secondary risks. A key data point underscoring this is the 5% increase in seismic events since 2020.
Originality/Value: This paper is one of the first to provide empirical evidence for the temporal ESG-value trade-off in the UK context while integrating the critical, yet unmodeled, risk of tertiary physical climate effects into the financial risk discourse.
