Climate Change Uncertainty and Supply Chain Financing

Abstract

This paper investigates the impact of climate change uncertainty on supply chain financing. Consistent with the view that suppliers become more conservative in response to climate change, we find that firms significantly curtail trade credit during periods of high climate change uncertainty. By exploiting two exogenous regulatory interventions in the US, we conduct two triple-differences (DiDiD) analyses and document that the negative impact of climate risk on trade credit is less pronounced and partially mitigated by the staggered adoptions of state-level Climate Change Adaptation Plans (CCAP) which systematically bolster states’ effort in mitigating climate change and the Interstate Banking and Branching Efficiency Act (IBBEA) which significantly increase credit supply. In our cross-sectional tests, we find that impact of climate change risk varies considerably with firm characteristics such as firms’ vulnerability to climate change, degree of pollution on the environment, and asset redeploybility. To further establish casual inference, we also conduct a series of endogeneity tests including a natural experiment using the Katrina Hurricane and an instrumental variable (IV) approach. Our finding is also robust to a battery of sensitivity tests, including propensity-score-matching (PSM) analyses and the alternative measures of key variables. Collectively, our findings highlight that climate change, as a new yet increasingly prominent risk factor, can undermine the financial resilience of the supply chain, which provides timely managerial and policy implications on how to cope with climate change as a global challenge in the context of the current global supply chain crisis and the COVID-19 pandemic.

Keywords: Climate Change, Climate Risk, Natural Disasters, Trade Credit, Supply Chain Financing

JEL Classification: G32, F64, D81, Q51