The impact of climate vulnerability on firms’ cost of capital and access to finance
By Gerhard Kling, Ulrich Volz, V. Murinde, Sibel Ayas. World Development, 2021
336 citations recorded by the source corpus.
Abstract This article presents the first systematic investigation of the effects of climate-related vulnerability on firms’ cost of capital and access to finance and sheds light on a hitherto under-appreciated cost of climate change for climate vulnerable developing economies. We first show theoretically how climate vulnerability could affect firms’ cost of capital and access to finance. Apart from a possible impact on cost of debt and equity, which drive cost of capital, firms in countries with high exposure to climate risk might be more financially constrained. The latter results in low levels of debt relative to total assets or equity due to restricted access to finance. We then examine this issue empirically, using panel data of 15,265 firms in 71 countries over the period 1999–2017. We invoke panel data regressions and structural equation models, with firm-level data from the Thomson Reuters Eikon database and different measures of climate vulnerability based on the ND-GAIN climate vulnerability index. We construct a new climate vulnerability index and use panel instrumental variable regressions to address endogeneity problems. Our empirical findings suggest that climate vulnerability increases cost of debt directly and indirectly through its impact on restricting access to finance. However, we find limited evidence that climate vulnerability affects cost of equity. Our estimations suggest that the direct effect of climate vulnerability on the average increase in cost of debt from 1991 to 2017 has been 0.63%. In addition, the indirect effect through climate vulnerability’s impact on financial leverage has contributed an additional 0.05%.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/100071b2b3eb9a73c28f1921fcd6e0c865e39649
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Citations in the corpus
- Feeling the Heat: Climate Risks and the Cost of Sovereign Borrowing (2021, methodology): “…of warm periods Projected change of flood hazard Infrastructure Projected change of hydropower generation capacity Projected change of sea level rise impacts Dependency on imported energy Population living less than 5m above sea level Source: Compiled by authors drawing from Kling et al. (2020).”
- Past, present, and future of sustainable finance: insights from big data analytics through machine learning of scholarly research (2022, neutral): “…more privilege position as compared to past researchers when they examine the direct and indirect causes and effects of myriad aspects of sustainable finance, especially in terms of its performance and return (Chen & Ma, 2021; Kling et al., 2021; Tian & Lin, 2019; Yao et al., 2021; Zhang, 2021).”