The effect of greenhouse gas emissions on cost of debt: Evidence from Canadian firms

Abstract

The aim of this paper is to investigate the relation between greenhouse gas (GHG) emissions and cost of debt and to estimate the cost that lenders are imputing to GHG emissions. Data on GHG emissions were hand‐collected from Carbon Disclosure Project reports, whereas data on the cost of debt and other financial data were obtained from Bloomberg Professional database. Using a sample of Canadian firms, the results show that GHG emissions increase firms' cost of debt. In other words, for each additional tonne of GHG emissions, the cost of debt increases on average by 11–15%. These results imply that creditors incorporate firms' GHG emissions into their lending decisions and they penalize the polluting firms. This could encourage firms to reduce and manage their GHG emissions because there is a cost associated with these emissions. This study is one of the first to examine the relationship between GHG emissions and the cost of debt.

Board interlocks and greenhouse gas emissions

“…Following Maaloul (2018), we measure GHG emissions performance using GHG emissions intensity , which is calculated as total CO 2 equivalent emissions in metric tons scaled by total revenue (in thousands) from Thomson Reuters Eikon database. Total CO 2 equivalent emissions are the sum of Scope 1 emissions (direct emissions) and Scope 2 emissions (indirect emissions).…”

Mandatory disclosure, greenhouse gas emissions and the cost of equity capital: UK evidence of a U‐shaped relationship

“…Previous studies seem to have several shortages. First, a few recent studies focused on exploring the GHGD–COC nexus in the context of developed economies such as the United States (Albarrak et al, 2019) and Canada (Maaloul, 2018), whereas others investigated this association in developing settings such as China (Li et al, 2017), India (Kumar & Firoz, 2018) and South Africa (Lemma et al, 2019). On the other hand, a few studies examined the GHGD–COC nexus in the context of multiple countries (e.g., Bui et al, 2020; He, Tang, & Wang, 2013; Trinks, Ibikunle, Mulder, & Scholtens, 2017).…”

“…Under the Paris Accord, for instance, several countries have pledged to minimise their GHG emissions in an effort to reduce the increases in global temperature by enacting appropriate environmental regulations. Relatedly, more than 40 states have applied a cap‐and‐trade program, which grants corporations tradable allowances for how much carbon dioxide they can reduce emitting each year (Maaloul, 2018).…”

“…Although prior researchers have recently sought to examine the impact of GHG emissions and/or disclosure on COC in various settings around the world (e.g., Albarrak et al, 2019; Bui et al, 2020; Kumar & Firoz, 2018; Lemma, Feedman, Mlilo, & Park, 2019; Maaloul, 2018), the expected effects of disseminating GHG information mandatorily on COC has not been examined, specifically in the UK settings (Alsaifi, Elnahass, & Salama, 2020). For instance, Albarrak et al (2019) indicate that the association between GHGD and COC is context specific, mainly associated with the regulatory environment.…”

Arcs of carbon awareness in the value chain and their antecedents

“…In the absence of large-scale mandatory carbon reporting directives, our study relies on carbon-related data from the CDP, similar to numerous other studies that use CDP data in their analysis (e.g., Guenther, Guenther, Schiemann, & Weber, 2016;Hassan & Romilly, 2018;Lee, 2012;Maaloul, 2018;Matsumura et al, 2014;Stanny & Ely, 2008). The CDP database is the largest source of carbon-related data (Doda, Gennaioli, Gouldson, Grover, & Sullivan, 2016), though it is based on firms' voluntary disclosures.…”