EconPapers    
Economics at your fingertips  
 

Carbon Risk, Carbon Risk Awareness and the Cost of Debt Financing

Juhyun Jung, Kathleen Herbohn () and Peter Clarkson
Additional contact information
Juhyun Jung: The University of Queensland
Kathleen Herbohn: The University of Queensland
Peter Clarkson: The University of Queensland

Journal of Business Ethics, 2018, vol. 150, issue 4, No 14, 1171 pages

Abstract: Abstract We seek insights into potential benefits for firms adopting strategies to improve business sustainability in a carbon-constrained future. We investigate whether lenders incorporate a firm’s exposure to carbon-related risk into lending decisions through the cost of financing, and if so, importantly whether firms can mitigate the penalty by demonstrating an awareness of their carbon risks. We use a sample of 255 firm-year observations from eight industries over the period 2009–2013. We measure carbon-related risk exposure as the firm’s historical carbon emissions and our primary measure of carbon risk awareness is based on the firm’s willingness to respond to the Carbon Disclosure Project (CDP) survey. We document a positive association between cost of debt and carbon risk for firms failing to respond to the CDP. Further, this association is economically meaningful, with a one standard deviation increase in carbon risk mapping into between a 38 and 62 basis point increase in the cost of debt. Equally, we find that this penalty is effectively negated for firms exhibiting carbon risk awareness. Our results are robust when we consider alternate measures of carbon awareness—disclosure through alternative medium to the CDP and firms’ annual cash investment in new capital assets using “cleaner” technology. Our results highlight not only the importance of carbon awareness as a business strategy for polluting firms, but also its importance to lenders exposed to their clients’ default and reputational risk. The debt market appears to incorporate historical carbon emissions and forward-looking indicators of carbon performance.

Keywords: Cost of debt; Carbon emissions; CDP; Cost of debt; Carbon awareness (search for similar items in EconPapers)
JEL-codes: G14 G20 M14 Q51 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (188)

Downloads: (external link)
http://link.springer.com/10.1007/s10551-016-3207-6 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jbuset:v:150:y:2018:i:4:d:10.1007_s10551-016-3207-6

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10551/PS2

DOI: 10.1007/s10551-016-3207-6

Access Statistics for this article

Journal of Business Ethics is currently edited by Michelle Greenwood and R. Edward Freeman

More articles in Journal of Business Ethics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2025-03-19
Handle: RePEc:kap:jbuset:v:150:y:2018:i:4:d:10.1007_s10551-016-3207-6