Climate change is one of the most urgent issues of the 21st century, threatening economies worldwide. In response, world leaders have implemented regulatory measures like the Paris Agreement, which aims to restrict the rise in global temperatures to under 2°C above pre-industrial levels (Mbanyele, 2023). While these climate commitments are essential, they also present significant challenges by exposing firms to both physical risks, such as extreme weather events, supply chain disruptions, and asset damage, and transitional risks, stemming from shifting regulatory requirements, evolving consumer expectations, and the need for technological adaptation (Li et al., 2025; Sautner et al., 2023).

Beyond climate change, geopolitical risk (GPR) has emerged as a critical destabilizing force that further complicates firms’ sustainability efforts (Caldara & Iacoviello, 2022). The Global Risks Report 20241 by the World Economic Forum identifies geopolitical tensions as a key driver of global economic uncertainty, leading to supply chain disruptions, trade restrictions, regulatory volatility, and increased operational costs. Geopolitical conflicts, such as trade wars, sanctions, and military tensions, can constrain firms' access to critical raw materials and energy sources (Abdullah et al., 2024; Gupta, 2023; Lee et al., 2023; Wang et al., 2021), thereby increasing production costs and reducing firms' ability to invest in climate resilience strategies. Geopolitical instability exacerbates financial constraints (Lee & Wang, 2021), making it difficult for firms to allocate resources toward green technologies, emissions reduction, and sustainability-driven innovation. Several studies have examined how climate risk is associated with various firm-level outcomes such as stock returns (Faccini et al., 2023; Sautner et al., 2023), cost of external financing (Huang et al., 2022; Huynh et al., 2020; Huynh & Xia, 2021; Javadi & Masum, 2021), capital structure (Ginglinger & Moreau, 2023), firm performance (Pankratz et al., 2023), innovation (Ongsakul et al., 2024; Tian et al., 2024) and bankruptcy risk (Feng et al., 2024). However, the relationship between geopolitical risk and firms' exposure to climate change risk remains understudied, a gap this study aims to address.

From a resource-based perspective, firms allocate resources to maintain a competitive edge (Barney, 1991). However, geopolitical tensions divert these resources toward crisis management (Abdullah et al., 2024). This diversion reduces firms' ability to invest in emissions reduction, climate change adaptation, and sustainable technology development, amplifying their exposure to climate-related financial risks, weakening global efforts toward carbon reduction and net-zero commitments. Additionally, geopolitical conflicts disrupt supply chains and inflate energy and raw material costs, further increasing firms' transition risks (Gupta, 2023; Wang et al., 2021). According to the Institutional theory, firms adapt to external pressures (Scott, 1995; Zucker, 1987). In geopolitically unstable regions, regulatory uncertainty and trade restrictions can hinder compliance with climate policies, exacerbating regulatory and reputational risks (Feng et al., 2024; Wali Ullah et al., 2024).

According to the dynamic capabilities theory, firms must sense and adapt to environmental changes like climate challenges by identifying risks and making timely strategic decisions (Li & Liu, 2014; Teece et al., 1997). In volatile conditions, however, the resource-based view is considered too static (Eisenhardt & Martin, 2000; Wang & Ahmed, 2007). Elevated geopolitical risk, resulting from conflicts, trade wars, or political instability, can constrain firms and weaken their dynamic capabilities, making it harder to manage climate-related exposure (Wang et al., 2024). Therefore, we argue that geopolitical risk amplifies firm-level climate risk. This effect is likely to be stronger among firms with high cash flow volatility, leverage, or financial constraints (Chowdhury et al., 2025; Lee & Wang, 2021; Wang et al., 2024).

Using a global sample of 56,601 firm-year observations from 40 countries spanning from 2004-2022, we find evidence suggesting that heightened geopolitical risk significantly increases firms' exposure to climate risk. This effect remains robust across various alternative proxies and after addressing potential endogeneity concerns through 2-stage least squares regressions (2SLS) and entropy balancing technique. Further analysis identifies cash flow volatility, financial constraints, and leverage as key mechanisms through which geopolitical risk exacerbates firm-level climate risk. Additional analyses reveal that the effect is stronger in countries with low peace and high political risk, and for firms in sectors with high environmental litigation risk.

Our study makes two key contributions. First, prior research has examined climate risk (Feng et al., 2024; Hossain et al., 2023; Li et al., 2025; Wali Ullah et al., 2024) and geopolitical risk (Abdullah et al., 2024; Gupta, 2023; Wang et al., 2021) individually. Our study extends this literature by linking these two risks. This is an important contribution due to the consideration of how geopolitical uncertainty influences firm-level climate change risk exposure, which to the best of our knowledge, has not been examined before. Second, we add to the literature on firm sustainability by identifying cash flow volatility, financial constraints, and leverage as key mechanisms through which geopolitical risk affect firms’ climate resilience. By uncovering these moderating factors, we provide detailed insights into the financial constraints that limit firms' sustainability commitments, emphasizing the broader economic and regulatory implications of geopolitical uncertainty.