Concerns About Climate Risk Shifting Investments away from Organizational Capital Assets
New research shows that climate risk leads to higher investments in physical capital – assets such as property, plant and equipment (PPE) – at the expense of investments in organizational capital activities such as brand building and human capital.
The findings are contained in the paper, “Relationship between Climate Risk and Physical and Organizational Capital”, 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, Professor of Accounting and Ron Binns Chair in Financial Reporting, Banking and Governance at Schulich, 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.”
Added Kanagaretnam: “Overall, our findings have significant implications for both domestic and multinational enterprises that engage in long-term investments against the background of climate change.”