The Moderating Effect of Climate Risk on the Relationship Between ESG Performance and Green Innovation: Evidence from an Emerging Market

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Abstract
Environmental, social, and governance (ESG) engagement has been identified as a strategic priority for firms. However, its impact on green innovation (GIN) remains contested. Indeed, the propensity for climate risk to shape the effectiveness of ESG-driven GIN is underexplored. This study investigates how ESG performance (ESGPerf) influences GIN and examines the moderating effect of climate physical risk within the Saudi setting over 2002–2024. Results from fixed-effects and two-stage least squares (2SLS) regressions applied to 460 firm-year observations show that ESGPerf promotes GIN, while climate risk independently stimulates innovation and dampens ESGPerf’s positive effect on GIN. These findings suggest that environmental uncertainty shifts firms’ resource allocation between long-term innovation and short-term adaptation, demonstrating that the strategic value of ESG investments is contingent on risk contexts and underscores ESG commitment as a potential strategic capability rather than mere symbolic compliance. These findings are insensitive to rigorous robustness checks, including alternative variables’ measures and estimation techniques.

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