Optimising Corporate Financial Performance Through ESG Integration Faced by Climate Change

The paper discusses how Environmental, Social, and Governance (ESG) integration may optimise corporate financial performance and climate-related risks and opportunities considering the mounting problem of climate change. We qualitatively and quantitatively examine how ESG integration affects corporate financial performance using the Pearson correlation coefficient, arbitrage pricing theory (APT) and scenario analysis as theoretical frameworks. The Pearson correlation coefficient assists in identifying potential correlations between ESG rating and return on assets (ROA). The APT assists in explaining the expected return after integrating ESG factors, while scenario analysis offers a measure of the possible risks of the portfolio connected to climate change concerns. We use the Morgan Stanley Capital Index (MSCI) ESG rating standards to evaluate a company's potential ESG performance. Furthermore, this paper's climate-related financial risk analysis is predicated on the four fundamental components of the Task Force on Climate-Related Financial Disclosure (TCFD) structure: Governance, Strategy, Risk Management, Metrics and Targets. The empirical findings reveal that integrating ESG factors into enterprise management tends to exhibit better financial performance and experience significant mitigation of climate-related risks. The research provides valuable insights for investors and policymakers to guide them towards more sustainable and risk-averse investment practices.