Carbon Risk and Access to Finance

Abstract

We examine the “downside” (carbon emissions) and “upside” (climate change exposure) effects of carbon risk on access to finance. We show that these effects are somewhat mitigated by firms’ ESG, but only in the maturity stage of the corporate life cycle: initial-stage firms do not significantly suffer difficulties in accessing external capital following their carbon risk, while ESG does eliminate carbon risk effects except at the marginal effects of 20–40%. Investment efficiency and working capital market are two channels through which carbon risk contributes to reducing access to finance. The results are consistent with previous empirical tests of the carbon risk hypothesis and information asymmetry theory.