Impact of Climate Change and Innovation on Profitability: The Moderating Effect of Financial Flexibility

Abstract

The paper investigates the effects of climate change and corporate innovation on profitability, considering the influence of financial flexibility. The research utilises data collected from the financial statements of publicly listed companies between 2010 and 2023, complemented by macroeconomic data from the IMF. It employs multivariate linear regression models, including Pool-OLS, Fixed Effects Model (FEM), Random Effects Model (REM), and Generalised Method of Moments (GMM). The findings reveal that climate change, measured by the greenhouse gases (GHG) and changes in rainfall (RAIN), negatively impacts profitability, which is assessed through Return on Assets (ROA) and Return on Equity (ROE). Additionally, corporate innovation (INV) also has a negative effect on profitability. Conversely, financial leverage and economic growth have a positive influence on profitability, while firm size has a negative impact on it. Moreover, the role of financial flexibility (FF) in corporate innovation has a positive impact on profitability. These research results are valuable for managers and investors as they make decisions, particularly regarding environmental solutions, corporate innovation, and profitability. To date, there has been no study examining the relationship between climate change, corporate innovation, and profitability, with a focus on the role of financial flexibility in Vietnam. This paper provides a practical basis for the above relationship.