Is It Worth Reducing GHG Emissions? Exploring the Effect on the Cost of Debt Financing
Posted: 8 Jul 2020
Date Written: June 13, 2020
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
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