The Impact of Climate Vulnerability on Firms’ Cost of Capital and Access to Finance

Kling, Gerhard; Volz, Ulrich; Murinde, Victor; Ayas, Sibel

Abstract

This paper investigates the effect of climate-related risk on firms’ cost of capital and access to finance. Building on recent findings that climate vulnerability significantly increases sovereign cost of debt, we posit a ‘pass-through effect’ whereby higher sovereign cost of debt affects firms’ cost of capital in two ways: it raises the costs of corporate debt; and it induces financial exclusion as credit-constrained firms are priced out of the market due to credit rationing. We invoke panel data regressions and structural equation models, using firm-level data from the Thomson Reuters Eikon database matched with ORBIS/Bureau van Dijk data on financial firms. We also use a novel measure, the distance to the steady-state, to estimate firms’ production functions, their steady-state and the shadow price of access to finance (or financial inclusion). Our empirical findings confirm the posited effects of the climate vulnerability risk premium on sovereign debt on both corporate cost of capital and on firms’ financial inclusion. Our analysis of 63,102 firms in 80 countries over the period 1993-2017 shows that on average the cost of debt in high-risk countries is 0.83 percentage points higher than in low-risk countries because of climate vulnerability.

Citation

Kling, G., Volz, U., Murinde, V., & Ayas, S. The Impact of Climate Vulnerability on Firms’ Cost of Capital and Access to Finance. London

• Working Paper Type: Working Paper
• Deposit Date: Aug 13, 2019
• Publicly Available Date: Aug 13, 2019
• Pages: 1-35
• Keywords: Cost of capital, climate risk, firms' access to finance