The long-term effects of climate change on the corporate sector: The case of Italy
Climate change is one of the major structural challenges currently facing the global economy (Blanchard and Tirole 2022), and economists are making great efforts to study its multiple impacts (e.g. Weder di Mauro 2021). In particular, high temperatures significantly reduce economic activity and growth, especially in poor countries (see Kolstad and Moore 2020 for an updated overview); Advanced economies are not immune, with recent evidence documenting that unpredictable temperature shocks can also have aggregate consequences for the US economy (Natoli 2022). As extreme climate events such as high temperatures are expected to become more frequent without proper mitigation measures, a key question in the current debate is how climate change might ultimately affect a country’s productive sector at an aggregate level.
This problem has been studied from different angles. One of them studies the geographic dimension of global warming. Climate phenomena can have heterogeneous impacts across space, potentially causing migration to low-risk areas, as reported in a recent special issue of the Journal of Economic Geography (Peri and Robert-Nicoud 2021) and in Albert et al. (2021). Another aspect concerns the direct impact of hot temperatures on companies (e.g. Addoum et al. 2020, Pankratz and Schiller 2021, Somanathan et al. 2021). During a heat wave, earnings may fall because workers in heat-exposed jobs may be less productive or absent more frequently on hot days, or more generally because high temperatures increase production costs. Over time, for some companies these effects can boost technological advances and disappear, while for others they accumulate and become permanent, increasing the likelihood of market exit.
Although these potentially diverging paths have potential implications for the aggregate market structure, they have not received much attention in the literature. In a recent article (Cascarano et al. 2022) we address this issue by analyzing the long-term effects of temperatures on the Italian corporate sector. We perform two analyses. First, we examine how extremely hot temperatures affect local firm demographics, namely firm entry, exit and relocation in local Italian labor markets (i.e. areas that are internally homogeneous in terms of commuter flows), using administrative data covering the entire Italian business sector are). . Second, company-level balance sheet data is used to prove how temperatures can impact corporate performance for companies that survive in the marketplace over the years.
Entry and exit from local labor markets
The demographic analysis is based on the Infocamere dataset, which contains administrative data on more than 2 million companies per year (the universe excluding one-person companies) between 2005 and 2019. We examine the effects of temperature on the determinants of the growth rate of active companies in a local labor market: the entry of newly created companies, the exit of companies going out of business and the relocation of companies (within Italy or abroad). We distinguish temperature impacts on a geographic scale associated with climate zones – hotter Mediterranean areas covering most of the coastal zone and colder temperate areas (see panel (a) of Figure 1) – and across sectors. As a proxy for heatwaves, we use a commonly used measure of the number of days in a year with maximum temperatures above 30°C, taking temperatures from the JRC MARS Meteorological Database. Because market dynamics typically move slowly, we test the cumulative temperature effects separately over a three-year period.
The heat map in image (b) shows the results, with red boxes indicating a positive effect of temperature, blue boxes a negative effect, and white boxes a zero (not significant) effect. Overall, extremely high temperatures lead to a decrease in the entry rate and, to a lesser extent, an increase in the exit rate of companies from local labor markets in the medium term. Most of the action takes place in the Mediterranean region, where the impact goes beyond agriculture (the impact of which is widespread across the country). The only sector that benefits from high temperatures in the Mediterranean zone is the electricity sector, probably because high temperatures boost electricity demand for air conditioning. A shift to more favorable climate zones (not shown in Figure 1) plays a subordinate role: temperature influences are negligible or not significant in almost all cases. Furthermore, the lack of a clear sector-level correspondence between higher exit (or no entry) in Mediterranean areas and higher entry in temperate areas suggests that other forms of climate-driven firm mobility – such as ceasing activity in one location and reopening in another – are at least of secondary importance in the case of Italy.
The effects of extreme temperatures on the market structure are quantitatively relevant. As the number of days with maximum temperatures above 30°C increases persistently by ten in a year, the growth rate of active companies falls by 0.13 percentage points, almost a tenth of the average growth rate in the sample, mainly due to the reduction in the price of admission . Using the projected local temperatures as in the central ETHZ-CLM scenario, our estimates imply a cumulative reduction in the corporate sector growth rate of 0.22 percentage points over the current decade.
illustration 1 The effect of high temperatures on entry and exit rates in Mediterranean and temperate areas
note: Panel (a) shows local labor markets classified into temperate and Mediterranean climate zones according to the Istat classification. Panel (b) shows the effects of an increase of 10 extreme temperature days over a 9-year period; red boxes: positive effect; blue boxes: negative effects; white boxes: no effect. The rows of the matrix indicate the sector according to the Nace Rev. 2 classification: A. Agriculture, forestry and fisheries; B. Mining and quarrying; C. Manufacturing; D. Electricity, gas, steam and air conditioning supply; E. Water supply, sewerage, waste management and remediation measures; F. Construction; G. Wholesaling and retailing, repair of automobiles and motorcycles; H. Transportation and storage; I. accommodation and catering services; J. Information and Communication; K. Financial and Insurance Activities; L. Real Estate Activities; M. Professional, scientific and technical activities; N. Administrative and Support Service Activities.
Effects at company level
To examine the impact of temperature on company results, we draw on nearly 10 million company-year balance sheet observations from the Cerved dataset. We divide companies into four size classes according to the Eurostat definition and examine the impact of temperatures on total assets, company equity, net sales, output and the number of employees. The results, shown in Figure 2, are quite remarkable. Over the medium term, companies in three out of four size classes are showing a positive impact from temperatures, suggesting that large enough companies are able to adapt to climate change and improve profitability. In contrast, micro-enterprises are shrinking – in terms of net revenue, output value and workforce – confirming their inability to adapt through green technology investments (Accetturo et al. 2022). The sample examined clearly only refers to the companies that remained active on the market over the entire observation period. Nonetheless, the analysis highlights a clear dichotomy in climate change resilience that appears to be particularly detrimental to very small firms.
figure 2 Firm-level effects across firm size classes
Overall, our results suggest that global warming will weigh on the corporate sector not only in terms of size but also composition. Higher temperatures could amplify the already existing differential growth path between small and large companies and stimulate a recomposition within the corporate sector in terms of value creation. This may not be irrelevant for aggregate productivity growth.
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