Abstract
As climate change increasingly impacts economic activity and corporate operations, companies must enhance their capacity to manage climate-related risks. At the same time, ESG ratings have become a crucial indicator of corporate sustainability, significantly influencing investor decisions. This study examines the impact of climate risks and ESG ratings on stock returns in the Chinese community region, focusing on 2,475 firms across Mainland China, Taiwan, Hong Kong, Singapore, and Malaysia from 2013 to 2021. The research investigates cross-country differences, how climate risks shape ESG ratings, and whether ESG performance influences financial returns under varying climate risk conditions. Using regression analysis with stock returns as the main performance measure, and ROA and Tobin’s Q as alternatives, the study also applies the Fama-MacBeth two-stage regression for robustness. The findings show a significant negative relationship between ESG ratings and firm performance, especially in the social and governance components, indicating that ESG activities often increase short-term costs. Interaction terms between climate risk and ESG ratings are also significantly negative, suggesting that heightened climate risk amplifies the financial burden of ESG implementation and further reduces performance and market value. Overall, the results highlight major challenges faced by firms in Chinese community countries, including limited policy incentives and high transition costs, which hinder the short-term financial benefits of ESG strategies. The study provides empirical evidence and strategic insights to support companies in navigating climate risk while promoting sustainable development.