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Carbon Emissions and the Cost of Debt Financing: What Role for Policy Commitment, Firm Disclosure and Corporate Governance?

Vera Palea () and Federico Drogo ()
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Federico Drogo: University of Turin,

Department of Economics and Statistics Cognetti de Martiis. Working Papers from University of Turin

Abstract: Over time, investors have become increasingly aware of the risks associated with a transition to a low-carbon economy. This study investigates the association between carbon emissions and the cost of debt financing for a sample of firms from the Eurozone in the period 2010 – 2018. Results provide evidence that the risk premium required by lenders increases with carbon emissions. However, while the most polluting sectors were already charged before the Paris Agreement, and not further penalized in the subsequent period, our results indicate that the less polluting sectors started being charged a higher spread for their emissions only in the period after the Agreement. The Paris Agreement appears to be a turning point around which lenders have become aware of the strong commitment taken by policymaker in fighting climate change. Our findings also suggest that increased levels of disclosure on climate-related issues can mitigate corporate carbon risk. On the other hand, results are not compelling when we consider the effect of control mechanisms, such as external verification for emissions, board oversight of carbon risk and the presence of emission reduction targets, on the cost of debt.

Pages: pages 47
Date: 2020-02
New Economics Papers: this item is included in nep-ene and nep-env
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