A system dynamic approach for exploring the effects of climate change risks on firms' economic performance

Abstract

A number of studies have recently examined the potential relationships between climate change and the business community. The majority of such studies have emphasized statistical and bench marking techniques to identify how climate change could have implications on firms’ operations and their economic performance. These techniques draw primary data from questionnaire surveys and corporate environmental reports in an ex post basis, a fact that provide evidence in a linear, probabilistic and static character. These studies have provided limited insights regarding the future complex effects of climate change on corporate economic performance. This paper aims to contribute to this literature by developing a dynamic model to investigate the evolutionary trends of the relationships between climate change risks, financial performance and the operational processes of firms. The main scope is to identify how physical, regulatory, reputation and litigation risks will affect day-to-day operations. An integrated model will be established in order to improve managers’ and academics’ understanding of climate change and business performance. Four scenarios will also be tested to illustrate “what if” relationships in the presence of climate change risks. Finally, the proposed model is based on the corporate climate change management, system thinking, system dynamic and Stella software.

Keywords: Climate change risks - Corporate sustainability - Stella software - System dynamic - System thinking