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

Gerhard Kling, Ulrich Volz, Victor Murinde, Sibel Ayas

Research output: Working paper

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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.
Original languageEnglish
Place of PublicationLondon
PublisherSOAS Centre for Sustainable Finance
Pages1-35
Number of pages35
Publication statusPublished - 2019

Fingerprint

Cost of capital
Vulnerability
Access to finance
Climate
Cost of debt
Financial inclusion
Country risk
Credit rationing
Panel data
Financial exclusion
Credit
Sovereign debt
Risk premium
Corporate debt
Shadow price
Data base
Costs
Pass-through
Production function
Structural equation model

Keywords

  • cost of capital
  • climate risk
  • firms' access to finance
  • financial inclusion

Cite this

Kling, G., Volz, U., Murinde, V., & Ayas, S. (2019). The Impact of Climate Vulnerability on Firms? Cost of Capital and Access to Finance. (pp. 1-35). London: SOAS Centre for Sustainable Finance.

The Impact of Climate Vulnerability on Firms? Cost of Capital and Access to Finance. / Kling, Gerhard; Volz, Ulrich; Murinde, Victor; Ayas, Sibel.

London : SOAS Centre for Sustainable Finance, 2019. p. 1-35.

Research output: Working paper

Kling, G, Volz, U, Murinde, V & Ayas, S 2019 'The Impact of Climate Vulnerability on Firms? Cost of Capital and Access to Finance' SOAS Centre for Sustainable Finance, London, pp. 1-35.
Kling G, Volz U, Murinde V, Ayas S. The Impact of Climate Vulnerability on Firms? Cost of Capital and Access to Finance. London: SOAS Centre for Sustainable Finance. 2019, p. 1-35.
Kling, Gerhard ; Volz, Ulrich ; Murinde, Victor ; Ayas, Sibel. / The Impact of Climate Vulnerability on Firms? Cost of Capital and Access to Finance. London : SOAS Centre for Sustainable Finance, 2019. pp. 1-35
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