Is It Worth Reducing GHG Emissions? Exploring the Effect on the Cost of Debt Financing

Posted: 8 Jul 2020

See all articles by Fabio Pizzutilo

Fabio Pizzutilo

Università degli Studi di Bari “Aldo Moro”

Massimo Mariani

LUM University - Department of Management

Alessandra Caragnano

LUM Jean Monnet university

Marianna Zito

LUM Jean Monnet university

Date Written: June 13, 2020

Abstract

Notwithstanding the proliferation of papers dealing with the corporate finance implications of the so-called “carbon risk”, very few studies analysed in depth the relationship between the firm’s environmental risk profile and the cost of debt financing. We contribute to this stream of research by inspecting the relationship between EuroStoxx 600 companies’ carbon emissions and cost of debt financing. We argue that lenders mitigate the impact of borrowers’ GHG emissions on their future cash flows primarily requiring firms with higher carbon emissions intensity to pay significantly higher costs for financing their operations through indebtedness. We also found statistically significant evidence to support the conclusion that the positive effect of carbon emissions reduction on the cost of debt financing is relevant both for high and low emitting industries. Finally, we postulated that high emitting firms pay, on average, a higher cost of debt financing than less olluting firms but are less penalized if an increase in their carbon intensity occurs. To the best of our knowledge, this is the very first study to directly document the impact of carbon emissions on the cost of debt financing for non-financial European industries, substantially enriching the existing environmental financial literature.

Keywords: Carbon risk, Cost of debt financing, Climate change, Carbon intensity, Greenhouse gases (GHG), Environmental risk

JEL Classification: G32, M14

Suggested Citation

Pizzutilo, Fabio and Mariani, Massimo and Caragnano, Alessandra and Zito, Marianna, Is It Worth Reducing GHG Emissions? Exploring the Effect on the Cost of Debt Financing (June 13, 2020). Journal of Environmental Management, Vol. 270, 2020, Available at SSRN: https://ssrn.com/abstract=3626264

Fabio Pizzutilo (Contact Author)

Università degli Studi di Bari “Aldo Moro” ( email )

largo Abbazia S. Scolastica, 53
Bari, 70124
Italy

Massimo Mariani

LUM University - Department of Management ( email )

S.S. 100 km 18
Casamassima, 70010
Italy

Alessandra Caragnano

LUM Jean Monnet university

Casamassima, BA 70010
Italy

Marianna Zito

LUM Jean Monnet university

Casamassima, BA 70010
Italy

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