Corporate Cost of Debt in the Low-carbon Transition: The Effect of Climate Policies on Firm Financing and Investment Through the Banking Channel

Excerpt:  “This paper assesses to what extent markets with sophisticated investors and large firms price transition risks due to climate policies. The analysis exploits longitudinal data on firms’ economic and environmental performances – as measured by emission intensity, patenting activity in mitigation technologies, and ESG scores – and syndicated loan data. It provides three main results. First, firms with good environmental performance (in terms of emission intensity or patenting activity in mitigation technologies) benefit from a significantly lower cost of debt as climate-change mitigation policies become more stringent. Second, ESG scores and their environmental pillar are not sufficiently informative to assess and price domestic climate policy risks. Third, more stringent mitigation policies encourage investment in green firms by reducing the cost of debt: an increase of about EUR 10/t CO2 in carbon taxes raises investment by about 12% for firms with high patenting activity in mitigation technologies while it decreases investment by about 11% for firms with high emission intensity.”