Firms and climate change: a review of carbon risk in corporate finance

Abstract

This paper provides an overview of financial economics-based research on carbon risk with an emphasis on corporate finance. In the corporate finance literature, carbon risk refers to the impact of society’s transition to a low-carbon economy on firm value due to tightening regulations, changing consumer preferences, reputational damage, etc. We focus on the links between carbon risk and different firm performance factors, such as firm risk, cost of capital, financial performance, firm value, and corporate decisions. Although research on carbon risk is still emerging in the corporate finance field, the amount of literature on this topic has been increasing, especially in the last 2 years. We find that some results are robust, while others are mixed. This indicates that conflicting hypotheses still exist, leading to a need for more in-depth exploration.

Institutional Ownership and Corporate Greenhouse Gas Emissions: The Evidence from China

“…Li et al (2020), Albuquerque et al (2019), and Karpoff (2012) demonstrate that firms can reduce long-term risk exposure by assuming environmental responsibility. Other studies, such as Brinkman et al (2008) and Wang et al (2022), confirm a negative effect of carbon risk on firm performance and value. Furthermore, indifference towards GHG emissions can result in regulatory penalties and an increased risk of financial losses and reputational damage (Dyck et al, 2019).…”

Do emissions reduction initiatives improve financial performance? Empirical analysis of moderating factors

“…Firm size (SIZE) is controlled for as the natural logarithm of firm’s total assets. Second, in line with previous studies (Lewandowski, 2017; Wang et al , 2014; Gallego-Álvarez et al , 2015), firm growth (GROW) is included as a control variable, which is calculated as the annual change in the firm’s sales. Third, prior studies have documented a significant impact of leverage on environmental and financial performance (Gonenc and Scholtens, 2017; Haque and Ntim, 2018).…”

“…Beta is used to capture the risk impact. Prior studies (Wang et al , 2014) have used beta to control for systematic risk. Sixth, consistent with previous studies (Lewandowski, 2017), we control for firm’s liquidity (LIQU) because a firm with strong liquidity is more likely to meet its current liabilities and have a substantial amount of cash available for investments, which can positively impact financial performance.…”

“…6.1 Robustness checks Several meta-analytic studies suggest that the causality between carbon emissions and financial performance is endogenous (Endrikat et al, 2014;Velte et al, 2020;Wang et al, 2022). More precisely, our analysis may suffer from the reverse causality/simultaneity issue which may raise a question:…”