Firms' Climate Risk-Taking Incentives
62 Pages Posted: 7 Jan 2025
Date Written: June 10, 2024
Abstract
We provide evidence on what incentivizes firms to increase their climate risk-taking exposure. A contractionary monetary policy rises the cost of capital and induces firms to decrease new investments resulting to higher levels of climate risk exposure. Both effects intensify for firms with high levels of climate risk. While monetary policy tightening increases risk premia and slows the firms' speed of adjustment towards an optimal level of investment, its contractionary effect is milder for firms with low climate risk. In contrast, when the central bank communicates a positive economic outlook induces firms to increase new investments and to lower climate risk exposure.
Keywords: Firm level climate risk, Monetary Policy, Corporate investment Jel Classification: G30, G32, G34
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