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

Journal of business ethics, 2018-07, Vol.150 (4), p.1151-1171 [Peer Reviewed Journal]

Springer Nature B.V. 2018 ;Springer Science+Business Media Dordrecht 2016 ;Journal of Business Ethics is a copyright of Springer, (2016). All Rights Reserved. ;ISSN: 0167-4544 ;EISSN: 1573-0697 ;DOI: 10.1007/s10551-016-3207-6

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  • Title:
    Carbon Risk, Carbon Risk Awareness and the Cost of Debt Financing
  • Author: Jung, Juhyun ; Herbohn, Kathleen ; Clarkson, Peter
  • Subjects: Assets ; Business and Management ; Business Ethics ; Capital ; Capital assets ; Carbon ; Clients ; Companies ; Cost benefit analysis ; Debt ; Debt financing ; Deviation ; Education ; Ethics ; Financing ; Investments ; Lending ; Management ; Mapping ; Philosophy ; Quality of Life Research ; Risk ; Sustainability ; Technology
  • Is Part Of: Journal of business ethics, 2018-07, Vol.150 (4), p.1151-1171
  • Description: 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.
  • Publisher: Dordrecht: Springer
  • Language: English
  • Identifier: ISSN: 0167-4544
    EISSN: 1573-0697
    DOI: 10.1007/s10551-016-3207-6
  • Source: ProQuest One Psychology
    ProQuest Central
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