The Impact of Natural Disasters on Corporate ESG Performance: Evidence from China

: Over the past decades, the frequency and economic losses from natural disasters have continued to escalate globally. Disasters pose significant challenges to global sustainable economic and social development. As a critical part of the economy, a firm’s ESG performance is a key indicator of sustainability. Whereas the determinants of firms’ ESG (environmental, social, and governance) performance have gained growing attention, limited research focuses on the impact of natural disasters on ESG performance. This paper provides the first empirical study on the short-, medium, and long-term impacts of natural disasters on firms’ ESG performance through the lensof earthquakes. By exploiting a difference-in-differences approach based on panel data of Chinese listed firms and a dataset of seismic events, this paper shows that earthquakes have a significant positive impact on affected firms’ ESG performance, with short-term positive effects on environmental and social performance and long-term positive effects on social and governance performance. Heterogeneity analysis reveals that the positive effects are more pronounced for state-owned firms, relatively smaller firms, and firms located in cities with frequent earthquake occurrences. This study highlights the distinct temporal effects on different ESG dimensions and provides new insights for policymakers to employ ESG practices to alleviate the negative effects of disasters.


Introduction
Against the background of recurrent global crises, including the COVID-19 pandemic, climate change, and labor disputes, leading firms have notably increased their awareness of and engagement in ESG principles [1].ESG principles have become key indicators of firms' management competence, risk management, and non-financial performance [2].A growing literature examines the external determinants of ESG performance, such as economic crisis [3], climate risks [4], and the COVID-19 pandemic [5,6].Aside from the above factors, natural disasters pose consistent risks to the economy [7].These disasters not only present significant challenges for firms in mitigating disaster losses but also heighten firm owners' risk expectations, potentially influencing firms' long-term operational and management patterns.Despite their significance, limited research focuses on the impact of disasters on firms' ESG performance, particularly in the medium and long term.Given the predicted rise in the frequency and intensity of natural disasters over the coming decades, it is imperative to study whether disasters affect firms' ESG performance.
This study examines the impact of disasters on firms' ESG performance through the lensof earthquakes.Earthquakes provide several advantages for examining the causal effect of disasters on ESG performances.First, they are among the most unpredictable and unavoidable disasters [8], which can be considered exogenous shocks to local firms, thereby enhancing the reliability of causal inference.Second, earthquakes have significant effects on the local economy.For example, Huang et al. [9] finds that earthquakes decrease a city's GDP per capita by 6.1% in China in the long run.Third, earthquakes constitute persistent threats to local firms [10].Although earthquakes cannot be controlled or predicted, firms can implement of meteorological disasters, including floods, storms, and typhoons [35][36][37][38][39].They find that, on average, disasters can significantly increase firms' factor inputs (fixed asset investment and employment) in the short run [35,36], which can be partially attributed to the post-disaster reconstruction investment, but the impacts on output and turnover have not reached a consensus [37][38][39].In addition, several studies focus on one devastating earthquake in Japan and examine its impacts on firms' factor inputs, outputs, and productivity [10,40,41].However, scant research has been conducted on the impact of disasters on firms' ESG performance.These findings push forward the understanding of disaster impact on firm performance.By highlighting the distinct temporal effects on different ESG components, this study contributes to the literature on disaster resilience and firm sustainability, emphasizing the importance of ESG in countering the negative effects of disasters.
The remainder of the paper is organized as follows.Section 2 describes the research hypothesis.Section 3 presents the data and identification strategy.Section 4 reports the main results and robustness tests, and Section 6 provides the discussion and conclusion of the paper.

Research Hypothesis
Firms need to undergo reconstruction in the short term after an earthquake, whereas in the long term, they need to make adaptive adjustments.In addition, the effects of earthquakes on the three dimensions of ESG (environmental, social, and governance) may differ.Therefore, in this section, this study discusses the potential short-term and medium-to long-term impacts of earthquakes on firms' three dimensions of ESG performance, respectively.

Short-Term Effect of Earthquakes on Firms' ESG Performance
Earthquakes typically cause significant physical damage and environmental disruption [9], prompting firms to prioritize immediate environmental responses.This includes measures such as disaster recovery, environmental cleanup, and infrastructure repairs [11,42,43].The urgent need to address these environmental impacts can lead to significant short-term improvements in firms' environmental performance.
Additionally, in the aftermath of an earthquake, there is often increased scrutiny from regulators, communities, and other stakeholders on the environmental and social practices of affected firms [44,45].Based on stakeholder theory [46], firms must address the needs and concerns of various stakeholders in the event of a crisis [47].In the aftermath of an earthquake, stakeholders pay closer attention to firm behavior, as the need for environmental and social activities drives them to increase pressure on firms to respond more to voluntary action, such as providing financial assistance, supplies, and resources for rebuilding efforts.Therefore, firms may demonstrate a high commitment to their social responsibility to attract more stakeholders' attention and enhance their reputation.
However, the swift response to an earthquake means that firms are likely to rely on their existing governance structures.This is because significant changes to governance practices typically require complex processes and a longer time to implement [48].In addition, in the aftermath of an earthquake, society as a whole, including firms, mainly focuses on post-disaster reconstruction [9].As such, the short-term response to an earthquake may not lead to significant changes in governance performance.
Given the above considerations, earthquakes can enhance firms' environmental and social performance in the short term.However, as firms focus primarily on mitigating environmental impacts and demonstrating social responsibility after earthquakes, the impact of earthquakes on firms' governance performance requires a longer time to manifest.

Medium-to Long-Term Effect of Earthquakes on Firms' ESG Performance
Whereas the initial post-disaster focus is on environmental recovery-where firms may make temporary investments in environmental reconstruction to mitigate negative effects and meet regulatory requirements-these investments are often not sustained over the long term.This is because resources initially diverted to address immediate environmental concerns are reallocated back to core business functions, shifting the focus towards stabilizing operations and ensuring financial health.Therefore, without continuous commitment and resources, the positive impacts of earthquakes on firms' environmental performance are difficult to maintain in the medium to long term.
However, firms may seek to strengthen their relationships with their stakeholders in the long run by demonstrating compliance with their ethical responsibilities and enhancing the firms' reputation over time [49].Specifically, earthquakes can have prolonged social impacts, such as displacement of communities [50], long-term health effects [51], and psychological stress [52].Therefore, firms face ongoing social challenges as they support affected employees and communities, rebuild social infrastructure, and restore public trust.Research has shown that post-disaster recovery efforts often involve significant social investments over extended periods [53].
Moreover, the governance structures of firms are often challenged in the aftermath of disasters [54].Effective governance requires robust risk management, transparency, and accountability, which are critical in navigating the complex recovery phase [55].This implies that in the short to medium term, the implementation of improved risk management practices may encounter considerable challenges.However, the long-term impact on governance scores turns positive, which can be attributed to the sustained efforts needed to enhance risk management practices, ensure compliance with new regulations, and rebuild stakeholder confidence.These improvements are crucial for sustaining stakeholder trust and ensuring robust decision-making processes [6].Therefore, earthquakes can have significant positive effects on firms' social and governance performances in the medium to long term.
To conclude, this study proposes the hypothesis that earthquakes lead to significant short-term improvements in environmental and social performance due to immediate disaster response and mitigation efforts.Over time, the emphasis shifts towards enhancing social and governance aspects to sustain stakeholder trust and ensure long-term resilience.
Hypothesis 1. Earthquakes could improve the ESG performance of firms in the short, medium, and long run.

Hypothesis 1a.
Earthquakes could improve the environmental performance of firms in the short run.

Hypothesis 1b.
Earthquakes could improve the social performance of firms in the short, medium, and long run.

Hypothesis 1c.
Earthquakes could improve the governance performance of firms in the long run.

Data
This study uses firms' ESG rating scores to measure their ESG performance.This study obtains ESG rating scores for Chinese-listed firms from 2012 to 2020 using the Huazheng Index of the Wind database.The ESG rating encompasses three key dimensions: environmental factors (e.g., green products, regulatory compliance, internal management systems), social factors (e.g., social contributions, institutional framework), and governance factors (e.g., operational risks, governance structure, institutional framework).
The seismic data are from the China Earthquake Data Center (Available at: https://data.earthquake.cn/,accessed on 16 May 2024).The dataset provides information on each seismic event, including the year of occurrence, latitude and longitude coordinates, and magnitude.This paper collects earthquake information from 1990 to 2020.This study considers earthquakes that happened prior to the survey year to account for the potential long-term effects of earthquakes.This is because earthquakes that happened before 2012 may also have a significant effect on firms' performances after 2012.Therefore, this paper incorporates earthquake data from 1990 onward to account for the influence of earthquakes that preceded the sampled years.This approach aligns with the methodology adopted by other relevant studies [9,11,56].Moreover, this paper only focuses on earthquakes that potentially have a significant impact on the local area, specifically those with a magnitude of 4.5 or higher.
This study obtains data on firm characteristics from the China Stock Market & Accounting Research Database (CSMAR) database and the city-level variables from the China City Statistics Yearbook from 2013 to 2021.
The matching process is conducted at the city level.This study identifies the city in which the firm is located using city-level geographic identifiers and the city where the earthquake occurred based on the latitude and longitude coordinates of the epicenter.This study excludes samples with missing variables and firms with Special Treatment (ST) (ST is a measure used by the Shanghai and Shenzhen Stock Exchanges to flag listed firms that face financial distress).The final sample comprises 6049 observations.Table 1 reports the summary statistics of the main variables.

Method
In order to examine the impact of earthquakes on firms' ESG performance, this study applies the DID strategy based on a sample of firms in earthquake-prone provinces.These provinces have at least one city that has experienced an earthquake since 1990.Earthquakes can occur anywhere in the seismic zone at any point in time, so all firms in these provinces face potential seismic risks.This study exploits the quasi-random spatial and temporal variations in earthquake occurrence and compares the ESG performance of listed firms in seismic cities before and after an earthquake with that of firms located in cities that did not experience earthquakes during the same period.The baseline specification is as follows: where ESG ict is the ESG rating score for firm i located in city c in year t.Earthquake ct denotes the city's earthquake experience.It can be expressed as Treat c × Post ct , where Treat c equals 1 if the city experienced earthquakes after 1990 and 0 otherwise; Post ct equals 1 if t ≥ t c,0 , where t c,0 is the year when city c first experienced an earthquake after 1990 and 0 otherwise.δ i is firm fixed effect; θ st is industry-year fixed effects; η pt is province-year fixed effects.X ict and Z ct denote firm and city controls, respectively.Following the literature [9,34], X ict includes firm age, total assets (log), leverage ratio, operational cash flow, return on assets, whether it is a state-owned enterprise (SOE), and the ownership concentration.
Z ct includes the city's population (log) and the city's GDP per capita (log).ε ict denotes random, idiosyncratic error terms, and standard errors are clustered at the city level.
To provide a more concise summary of the impact of an earthquake and increase the accuracy of these estimates, this study adopts a specification proposed by Gignoux and Menéndez [11] and categorizes the post-earthquake period into three intervals: 0-1, 2-5, and 6 or more years.The specification is as follows: where Earthquake 0-1 ct , Earthquake 2-5 ct , and Earthquake 6+ ct denote whether the city has experienced an earthquake within 1 year, 2-5 years, and 6 or more years, respectively.Other variables are the same as those in Equation (1).By estimating the coefficients β 1 , β 2 , and β 3 , this study can obtain the average short-, medium-, and long-term effects of earthquakes on firms' ESG performance in seismic cities.

Baseline Results
Table 2 reports the impact of earthquakes on firms' ESG performance.Specifically, columns (1)-( 2) present estimated results for Equation (1) and columns (3)-( 4) report the estimates of Equation (2).Columns ( 1) and (3) include firm, industry-year, and province-year fixed effects.Columns ( 2) and ( 4) further include firm-and city-level controls.Earthquake represents whether a city has experienced an earthquake; Earthquake 0-1 represents whether a city has experienced an earthquake within 1 year, Earthquake 2-5 represents whether a city has experienced an earthquake within 2-5 years, Earthquake 6+ represents whether a city has experienced an earthquake 6 years and before.Robust standard errors are clustered at the city level.* p < 0.1, ** p < 0.05, *** p < 0.01.
In columns ( 1) and ( 3), this study finds that the coefficient of Earthquake is positive and statistically significant, which suggests that firms located in cities that have experienced an earthquake have higher ESG performance compared to those in cities that have not experienced an earthquake.In columns (2) and ( 4), the coefficients of Earthquake 0-1 , Earthquake 2-5 , and Earthquake 6+ are all significantly positive.To quantify the impact, in column (2), after controlling for other variables, the coefficient for Earthquake is 2.947.This means that the ESG score of firms that are affected by an earthquake increased by 2.947.According to the summary statistics of Table 1, the mean of firms' ESG score is 72.47 for the whole sample.This implies that an earthquake increases the ESG of a firm by 4% (2.947/72.47).In column (4), earthquakes increase firms' ESG scores by 2.278, 1.123, and 3.185 on average, in the short-, medium-, and long-term, respectively.Given the mean of the ESG score is 72.47 for the whole sample, these findings suggest that the ESG score increases by about 3.1% (2.278/72.47),1.5% (1.123/72.27),and 4.4% (3.185/72.47) in three periods.
Table 3 reports the effects of earthquakes on firms' environmental (E_Score), social (S_Score), and governance performance (G_Score).This study finds that earthquakes have a significantly positive impact on firms' environmental and social performances in the short term.These results can be driven by the post-disaster recovery and reconstruction efforts after earthquakes, as well as increased attention from stakeholders.The need for environmental restoration and social support drives stakeholders to increase pressure on firms to respond more to voluntary action.These results align with Zhang et al. [57], which finds that firms' philanthropic disaster response behavior significantly increased after a catastrophic event-the 2008 Sichuan earthquake in China.Notes: E_Score, S_Score, and G_Score denote firms' environment score, social score, and governance score, respectively.Earthquake 0-1 represents whether a city has experienced an earthquake within 1 year, Earthquake 2-5 represents whether a city has experienced an earthquake within 2-5 years, Earthquake 6+ represents whether a city has experienced an earthquake 6 years and before.Robust standard errors are clustered at the city level.* p < 0.1, ** p < 0.05, *** p < 0.01.
The medium-term effect of earthquakes on firms' ESG performance is mainly driven by firms' increased social scores, whereas the long-term effect of earthquakes is driven by firms' elevated social and governance scores.These results suggest that firms' social performance is the most affected dimension of ESG.According to the stakeholder theory, firms need to demonstrate compliance with their ethical responsibilities even if the crisis ends in order to strengthen their relationships with their stakeholders and enhance their reputation in the long run.Therefore, firms' social performance is enhanced following earthquakes, with such effects persisting over the long term.Moreover, the long-term positive effect of earthquakes on firms' governance performance is also in line with this study's hypothesis, which suggests that firms take a relatively longer time to enhance their governance performance to ensure long-term resilience in the face of future risks.To conclude, these findings imply that when faced with disaster shocks, firms use ESG as a safety net to counter the negative effect.

Parallel Trend Test
The underlying assumption of the DID strategy is that conditional to a set of firm and city characteristics, as well as fixed effects, the pre-earthquake trend in ESG performance for both treatment and control groups should be similar.To validate this assumption, this study employs an event study approach as follows: where Earthquake cm equals 1 if and only if t − m * c = m, with m * c denoting the year of the earthquake occurrence.The normalized variable m is centered at zero for the year of the earthquake.Other variables are consistent with the specification in Equation (1).
Estimates are shown in Figure 1.This study finds that there are no significant trend differences in firms' ESG performance between the treatment group and control group in the years before earthquakes.However, most estimated coefficients are significant and positive in the years after the earthquake, which is similar to the baseline results.The above results support the validity of the identification assumption.

Robustness Tests
This paper conducts a battery of robustness tests, which includes using alternative control groups, considering the impacts of historical earthquakes and minor earthquakes, and conducting placebo tests.
Alternative Control Groups.To ensure the robustness of the baseline estimates, this study employs four alternative control groups.The first control group comprises cities that are situated in seismic zones across all provinces but have not encountered earthquakes since 1990.Second, this study selects firms in cities surrounding the earthquake-affected cities but not immediately adjacent to them as the control group.Third, this study identifies cities that have similar seismic risks in earthquake-prone provinces but have not experienced any earthquakes since 1990 and employs firms in these cities as the control group.Last, this study includes firms in cities with a historical record of earthquakes but have not encountered earthquakes since 1990.The results of these alternative control groups are presented in columns ( 1)-( 4) of Table 4, where this paper observes that the coefficients of interest remain robust.
Consider Impact of Historical Earthquakes.To mitigate the concern that the control group may be affected by earthquakes that happened before 1990, this paper excludes firms in cities that have experienced earthquakes since 1950 and re-estimates Equation (2).The results are presented in column (5) of Table 4, which reveals the coefficients of interest remain robust.
Consider Impact of Minor Earthquake.To alleviate the concern that earthquakes with a magnitude less than 4.5 (minor earthquakes hereafter) might affect firms' ESG performance, this study constructs measurements of minor earthquakes in the same way as those in the baseline regression and controls for them in Equation ( 2).The results are reported in column (6) in Table 4.The coefficients of interest are still positive and statistically significant, and coefficients of minor earthquake experience are insignificant, which is consistent with this study's expectations.Placebo Test.This study employs a placebo test to address concerns regarding potential omitted variables or misspecification in the baseline results.This involves randomly assigning the earthquake experience for each city year, creating "false" earthquake experience variables based on the actual dataset.The regression analysis using these false variables should produce statistically insignificant estimates.This study conducts this random assignment procedure 500 times by using specifications (1) and (2). Figure A1 shows the density distributions of the four estimated coefficients derived from placebo tests.Notably, the distribution of estimates generated by random assignment is centered around zero, which suggests that the findings are not spurious.

Heterogeneity Analysis
Next, this study explores whether and how the effects of earthquakes vary along the dimensions of firm and city characteristics, which include firms' ownership and size, as well as the city's frequency of earthquake occurrence.These analyses could help us better understand the effects of earthquakes and make targeted policies in disaster-prone regions.The results are reported in Table 5.
SOE vs. Non-SOE.To examine whether firm ownership is important in determining the earthquake's effects on firms' ESG performance, firms are sorted into SOE firms and non-SOE firms.This study introduces interactions between SOE and earthquake exposure in different time intervals.As shown in column (1) of Table 5, the coefficients of Earthquake 0-1 × SOE and Earthquake 2-5 × SOE are positive and significant, which indicates SOE firms are more likely to be affected by earthquake shocks and increase their ESG performance.A possible explanation is that SOEs have a closer connection with the government and are more willing to take responsibility for post-disaster reconstruction.
Large vs. Small.This study further investigates the role of firm size in an earthquake's effects.This paper includes interactions between earthquake exposure and "Large", which is an indicator of whether firms' total assets are higher than the median of the whole sample; results are displayed in column 2 of Table 5.The coefficients of the interaction term are negative, and the coefficients of earthquake exposure are all significantly positive, which implies that smaller firms are more likely to increase their ESG performance after earthquake shocks.Notes: ESG denotes corporate ESG score.Earthquake 0-1 represents whether a city has experienced an earthquake within 1 year, Earthquake 2-5 represents whether a city has experienced an earthquake within 2-5 years, Earthquake 6+ represents whether a city has experienced an earthquake 6 years and before.Robust standard errors are clustered at the city level.SOE denotes whether a firm is a state-owned enterprise (YES = 1; NO = 0); Large denotes whether a firm's total assets are higher than the median of the whole sample (YES = 1; NO = 0); In f requent cities and Frequent cities denote whether a city's earthquake frequency is below/above the median frequency of earthquake cities, respectively.* p < 0.1, ** p < 0.05, *** p < 0.01.
Frequent earthquake cities vs. infrequent earthquake cities.This study examines the heterogeneous effects of earthquakes on firms' ESG performance in cities with varying earthquake frequencies.This study classifies earthquake cities into frequent and infrequent cities based on whether their earthquake frequency is above or below the median frequency of all earthquake-affected cities, which is 3 in the sample this study uses.Specifically, In f requent denotes whether a city's frequency of earthquake experience is 1 or 2 (Yes = 1; otherwise = 0); Frequent denotes whether a city's frequency of earthquake experience is 3 or more (Yes = 1; otherwise = 0).This study interacts these variables with earthquake exposure.As shown in column 3 of Table 5, the magnitude of the earthquake exposure coefficients for frequent cities is larger than for infrequent cities.This result suggests that firms in cities with frequent earthquakes are more likely to improve their ESG performance.One possible explanation is that frequent earthquake shocks update firm owners' risk perceptions, making them more aware of disaster risks and prompting them to find ways to adapt, thereby enhancing their ESG performance.

Discussion and Conclusions
This paper examines the impact of earthquakes on firms' ESG performance.Based on Chinese listed firm panel data, the findings reveal that earthquakes positively impact the ESG performance of listed firms.The conclusion is robust to a battery of tests, such as parallel trend tests, applying alternative measurements of earthquake experience, and exploiting different samples.Moreover, the short-term effect of earthquakes on firms' ESG is mainly driven by the improvements in firms' environmental and social performances, whereas the medium-to long-term effect is primarily driven by firms' increased social and governance performance.Further heterogeneity analysis reveals that the positive effects are more pronounced for state-owned firms, relatively smaller firms, and firms located in cities with frequent earthquake occurrences.
This paper provides new insights into how various dimensions of firms' ESG performance respond to exogenous shocks, such as earthquakes, in different stages.Based on the findings, this study suggests firms can adopt ESG practices to mitigate the adverse impacts of natural disasters and improve their sustainability.These include improving environmental practices, such as sustainable resource management, which can lessen the negative impact of disasters.Moreover, improving strong social performance, including employee safety and community engagement, along with robust governance practices, such as transparent decision-making and effective risk management, can enhance a firm's resilience to disasters.Given that SOE firms, relatively smaller firms, and firms in frequent cities are more likely to enhance their ESG performance in the face of disaster shocks, this study offers insights for policymakers to encourage non-SOE firms, large firms, and firms in infrequent disaster-stricken cities to enhance their ESG practices.
Whereas ESG and CSR are generally viewed as positive, there are instances where firms may exploit these practices to mask fraudulent activities, as highlighted by Li et al. [58] in their study on charitable donations and goodwill impairment among Chinese listed firms.Future research can be conducted to examine the conditions under which ESG practices are most likely to be abused in the context of natural disasters.Moreover, given that the empirical analysis is based on Chinese-listed firms with substantial market volumes, further research could focus on small-and medium-sized firms to examine whether they exhibit different ESG performances following disaster shocks.This can help comprehensively understand the effects of disasters and provide implications for firms to take effective measures to adapt to natural disasters.

Figure 1 .
Figure 1.Effects of earthquakes on firms' ESG performance.Notes: This figure illustrates the effects of earthquakes on firms' ESG scores following (or before) their occurrence.The dashed line shows the 95% confidence interval for each coefficient estimate.Standard errors are clustered at the city level.

Table 2 .
Effects of earthquakes on firms' ESG performance.

Table 3 .
Effects of earthquakes on firms' subcategory of ESG performance.