Are Global Companies Overexposed to Climate Change? Physical Climate Risk and Foreign Direct Investment

By Xia Li

Facilities across the globe are facing climate change exposure or physical climate risks, such as sea-level rise, heat stress, wildfire and floods. In 2021, floods in Germany and China disrupted the global shipping industry. Heat stress caused substantial labor productivity loss in countries like Australia, while rising sea levels affected infrastructure investments in countries like Pakistan.

Given these developments, how do multinational companies incorporate climate change exposure into their overseas investment decisions? Are there differences between foreign facilities and local facilities regarding their physical climate risks? Is climate change exposure of overseas investments from China, one of the largest sources of outward foreign investment across the globe, different from the rest of the world? In a new journal article published by Nature Communications, a team of researchers at the Boston University Global Development Policy Center examine the climate change exposure of multinational companies’ foreign direct investment (FDI).

The study is the first to systematically examine the physical climate risks of firms’ FDI around the world. It finds that foreign firms tend to shy away from countries with higher physical climate risks than do local firms, which by nature have less choice in where facilities can be located. Additionally, Chinese FDI is significantly more exposed to most physical climate risks than non-Chinese FDI from the Europe, the Americas and other countries across regions.

The main results of the study suggest FDI has lower physical climate risk than local firms across countries. This is probably because multinational companies are concerned with different kinds of host country risks, including climate risks, when investing abroad. They may face more scrutiny by host country stakeholders and have difficulty in responding to some local conditions. Within host countries, however, the differences in climate change exposure between overseas and local facilities are small. In other words, foreign firms tend to shy away from countries with higher levels of physical climate risks than local firms, which by their nature have less choice regarding where facilities can be located. When foreign firms do locate in particular countries, however, they take on similar levels of climate risks as local firms, as physical climate risks are determined by facilities’ locations and the nature of their economic activities and are greatly influenced by the host country’s climate, despite their foreign ownership.

The study also examines climate change exposure of firms’ overseas facilities by industry. The results show that location-specific assets in resource-intensive sectors, such as agriculture, mining and manufacturing, are more directly affected by heat and water stresses, while trade and transportation sectors are more directly affected by sea-level rise and hurricane and typhoon risks, as their assets are usually near seaports.

Further, the study explores and compares the climate change exposure of Chinese overseas facilities with those of non-Chinese overseas facilities. The study finds that Chinese FDI is exposed to higher physical climate risk than non-Chinese FDI across host countries, particularly to higher water stress, floods, hurricanes and typhoon risks. However, within host countries, the climate change exposure of Chinese overseas facilities is comparable to those of non-Chinese FDI. One plausible explanation is that some Chinese companies are willing to invest in countries for political or strategic reasons, regardless of their climate change exposure. Moreover, Chinese companies began investing heavily overseas in the past two decades and may therefore have had to invest in locations with higher physical climate risks, as companies from other countries had already invested in less-risky locations.

These findings have implications for climate-related policies and practices. For example, governments may want to take climate change exposure into consideration when promoting their FDI. Also, as firms are increasingly affected by physical climate change risks, they will need to take these risks into their decision-making processes regarding overseas investments.

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