Climate Change Effect on Cost of Capital

Abstract

This paper analyses the effect of increased climate vulnerability on the cost of capital for Danish companies from 2001 to 2021. The paper addresses these effects from a theoretical viewpoint by analyzing them in a WACC framework. Thereafter, it tests the theoretical framework empirically by analyzing data over the past 20 years. The results show that the cost of debt has not experienced a significant effect from climate vulnerability, whereas the cost of equity has been affected in certain industries. In addition, it extends the literature by analyzing the effect of climate vulnerability in a developed country.

Keywords: WACC, Cost of Capital, Climate Change, Capital Structure