The long-term effects of climate change on the corporate sector

The long-term effects of climate change on the corporate sector: the Italian phenomenon

Climate change is a major structural challenge currently facing the global economy (Blanchard and Tirole 2022), and economists are making a great effort to investigate its multifaceted effects (e.g. Weder di Mauro 2021). In particular, high temperatures significantly reduce economic activity and growth, especially in poorer countries (see Colstad and Moore 2020 for a recent review); While developed economies are not immune, recent evidence suggests that unpredictable temperature shocks could have far-reaching consequences for the U.S. economy (Natoli 2022). Without appropriate emissions reduction policies, climate-induced extremes such as high temperatures are expected to become increasingly frequent, a key question in the current debate is how climate change will ultimately shape a country’s productive sector as a whole.

This problem has been investigated from many angles. One of them explores the geographical dimensions of global warming. Climate events may have different effects across space, possibly moving to less risky areas, as has been investigated in recent special issues of the Journal of Economic Geography (Perry and Robert-Nicod 2021) and Albert et al. (2021). Another aspect is the direct effect of hot temperatures on farms (e.g. Addoum et al. 2020, Pankratz and Schiller 2021, Somanathan et al. 2021). During heatwave, revenues may decline because workers in heat-exposed occupations may be less productive or more absent on hot days or, more generally, because higher temperatures increase production costs. In the long run, these effects can stimulate technological advances for some firms and become extinct, while they can accumulate and become permanent for others, increasing the likelihood of exiting the market.

While potentially having an impact on the overall market structure, these potentially deviant pathways have not received much attention in the literature. In a recent study (Cascarano et al. 2022), we addressed this problem by analyzing the long-term effects of temperature on the Italian corporate sector. We perform two analyzes. First, using administrative data covering the entire Italian corporate sector, we explore how extreme temperatures affect local farm populations, such as the entry, exit, and relocation of firms across the Italian local labor market (i.e., internally homogeneous areas in terms of work flow). Second, the firm-level balance sheet data is employed to provide evidence of how temperature can affect strong performance for those who survive the market year after year.

Entry and exit from the local labor market

Between 2005 and 2019, more than 2 million firms (excluding one-person companies in the universe) contain administrative data every year, gaining population analysis on Infocomm’s dataset. We examine the effect of temperature on the growth rate determinants of active bodies. In the local labor market: entry of newcomers, exit of closed companies and relocation of companies (within Italy or abroad). We distinguish the effects of temperature across a geographical dimension associated with climatic zones – warmer Mediterranean regions, which cover most coastal regions, and cooler temperate regions (see panel (a) in Figure 1)) – as well as industries. For proxies for heat waves, we take a commonly used measure of the number of days in a year with a maximum temperature above 30 ° C by taking the temperature from the JRC MARS meteorological database. Since market dynamics are generally slow, we examine the effects of stored temperature over a period of three years individually.

The panel heat map (b) displays the results, the red boxes indicate the positive effect of temperature, the blue boxes have a negative and the white boxes have a zero (non-significant) one. Overall, due to extremely high temperatures, in the medium term, the penetration rate decreases and, to a lesser extent, the exit rate of companies from the local labor market increases. Most of the measures are carried out in the Mediterranean region, where the effects extend beyond agriculture (which extends across the country). The only sector in the Mediterranean region that has benefited from high temperatures is the power sector, with high temperatures increasing the need for electricity for air conditioning. The shift towards a more favorable climate zone (not shown in Figure 1) plays a small role: the effects of temperature are not negligible or significant in almost all cases. Furthermore, the lack of a clear sector-level correspondence between higher exits (or missing entrances) in the Mediterranean region and higher entrances to temperate regions suggests that other forms of climate-induced rigidity – such as shutting down activity in one place and reopening in another – Of secondary importance.

The effects of extreme temperatures on market structures are quantitatively relevant. With the maximum temperature above 30 ° C, the number of days permanently increases ten times a year, the growth rate of active entities decreases by 0.13 percentage points, which is about one tenth of the average growth rate of the sample, mainly due to declining entry rate. Using predictable local temperatures, such as the central ETHZ CLM situation, our estimates indicate a decrease of 0.22 percentage points accumulated in the growth rate of the corporate sector in the current decade.

Figure 1 Effects of high temperatures on entry and exit rates in the Mediterranean and temperate regions

Note:: Panel (a) Displays the local labor market, classified into temperate and Mediterranean climates according to the estate classification. Panel (b) shows the effect of 10 extreme temperature days increase over a period of 9 years; Red box: positive effect; Blue box: negative effects; White box: No effect. Rows of Matrix Nace Rev. 2 Indicates sectors according to classification: A. Agriculture, forestry and fishing; B. Mining and quarrying; C. Production; D. supply of electricity, gas, steam and air conditioning; E. Water supply, sewerage, waste management and remediation activities; F. construction; G. Wholesale and retail trade, repair of motor vehicles and motorcycles; H. Transportation and storage; I. Accommodation and food service activities; J. information and communication; K. Financial and insurance activities; L. Real estate activities; M. Professional, scientific and technological activities; N. Administrative and support service activities.

Strong-level effects

To investigate the effect of temperature on firm results, we relied on observations of approximately 10 million firm-year balance sheets from served datasets. We divide firms into four size categories by Eurostat definition and explore the effects of temperature on total assets, firm equity, net revenue, cost of production and number of employees. The results shown in Figure 2 are quite interesting. In the medium term, farms in three of the four sizes show a positive effect of temperature, suggesting that large enough companies have the ability to adapt to climate change and improve their profitability. In contrast, small companies shrink in size – in terms of net revenue, cost of production, and number of employees – ensuring their inability to adapt by investing in green technology (Axeturo et al. 2022). Clearly, the sample under investigation refers only to companies that were active in the market during the entire observation period. Nevertheless, the analysis reveals a clear dichotomy in the resilience of climate change, which seems to be particularly detrimental to very small organizations.

Figure 2 Strong-level effects throughout the firm-sized class

Overall, our research suggests that global warming will weigh on the corporate sector not only in terms of size, but also in terms of structure. High temperatures can expand the already existing growth paths between small and large companies, stimulating a reorganization within the business sector in terms of value addition creation. It may not be unnecessary to increase overall productivity.


Accetturo, A, G Barboni, M Cascarano, E Garcia-Appendini and M Tomasi (2022), “Credit Supply and Green Investment”, mimeo.

Addoum, JM, DT Ng and A Ortiz-Bobea (2020), “Temperature Shock and Establishment Sales”, Review of Financial Studies 33 (3): 1331–1366.

Blanchard, O and J Tirole (2022), “Major Future Economic Challenges”,, 21 March.

Colstad, CD and FC Moore (2020), “Estimating the Economic Impact of Climate Change Using Climate Observation”, Environmental Economics and Policy Review 14 (1): 1-24.

Perry, G. and F. Robert-Nicode (2021), “On the Economic Geography of Climate Change”,, 11 October.

Albert, C. P. Boostos and J. Pontiselli (2021), “How Climate Change Redefines Capital and Labor in Countries: New Evidence from Brazil”,, 26 November.

Cascarano, M, F Natoli and A Petrella (2022), “Entry, Exit and Market Structure in a Changing Climate”, MPRA Paper No. 112868, University of Munich Library, Germany.

Natoli, F. (2022), “Surprising push of temperature”, MPRA paper 112568, University Library of Munich, Germany.

Pankretz, N. and Schiller (2021), “Climate Change and Adaptation in the Global Supply-Chain Network”, in Activities of EUROFIDAI-ESSEC, Paris December 2019 Finance Meeting, European Corporate Governance Institute-Finance Working Paper.

Somanathan, E. R. Somanathan, A. Sudarshan and M. Tewari (2021), “The Effect of Temperature on Productivity and Labor Supply: Evidence from Indian Production”, Journal of Political Economy 129 (6): 1797–1827.

Weder di Mauro, B (ed.) (2021), Fighting Climate Change: A CEPR CollectionCEPR Press.

Leave a Reply

Your email address will not be published.