Driving sustainable performance through eco-conscious behavior: Evidence from PSX 100 firms

Abstract

This paper empirically analyzes how climate risk, in the form of temperature variations, natural hazards, and air quality affect the performance of stock markets in Pakistan, using the PSX-100 index and its financial and non-financial sectors. The study employs a hybrid approach that includes a time-series regression of the aggregate PSX-100 index and two-way fixed effects panel regressions of the firm-level financial and non-financial sector data (2020-2024) with a sustainability index as a moderating variable. The results indicate that climate risks are significantly negatively related to financial stability, which proves the destabilizing impact of environmental degradation on capital markets. More importantly, the sustainability index has a robust positive moderating impact, which alleviates these negative effects and highlights the importance of corporate sustainability practices to economic resilience. The research has certain policy implications since it recommends the establishment of compulsory climate-related financial reporting (in line with the TCFD framework) and the creation of a national sustainability taxonomy to inform the allocation of capital. These implications are crucial to policymakers, regulators, and corporate executives to balance economic planning with sustainability objectives, reduce systemic climate risk and contribute to the achievement of the UN SDGs. This study is one of the earliest to examine the moderating effect of sustainability in the climate-finance nexus in Pakistan and identifies sustainability as an important process of market resilience and provides evidence-based advice on climate-responsive economic policy.