Carbon risk, carbon risk awareness and the cost of debt financing

Jung, Juhyun, Herbohn, Kathleen and Clarkson, Peter (2016) Carbon risk, carbon risk awareness and the cost of debt financing. Journal of Business Ethics, . doi:10.1007/s10551-016-3207-6

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Author Jung, Juhyun
Herbohn, Kathleen
Clarkson, Peter
Title Carbon risk, carbon risk awareness and the cost of debt financing
Journal name Journal of Business Ethics   Check publisher's open access policy
ISSN 0167-4544
Publication date 2016-05-28
Year available 2016
Sub-type Article (original research)
DOI 10.1007/s10551-016-3207-6
Open Access Status Not Open Access
Total pages 21
Place of publication Dordrecht, Netherlands
Publisher Springer Netherlands
Language eng
Formatted abstract
We seek insights into potential benefits for firms adopting strategies to improve business sustainability in a carbon-constrained future. We investigate whether lenders incorporate a firm’s exposure to carbon-related risk into lending decisions through the cost of financing, and if so, importantly whether firms can mitigate the penalty by demonstrating an awareness of their carbon risks. We use a sample of 255 firm-year observations from eight industries over the period 2009–2013. We measure carbon-related risk exposure as the firm’s historical carbon emissions and our primary measure of carbon risk awareness is based on the firm’s willingness to respond to the Carbon Disclosure Project (CDP) survey. We document a positive association between cost of debt and carbon risk for firms failing to respond to the CDP. Further, this association is economically meaningful, with a one standard deviation increase in carbon risk mapping into between a 38 and 62 basis point increase in the cost of debt. Equally, we find that this penalty is effectively negated for firms exhibiting carbon risk awareness. Our results are robust when we consider alternate measures of carbon awareness—disclosure through alternative medium to the CDP and firms’ annual cash investment in new capital assets using “cleaner” technology. Our results highlight not only the importance of carbon awareness as a business strategy for polluting firms, but also its importance to lenders exposed to their clients’ default and reputational risk. The debt market appears to incorporate historical carbon emissions and forward-looking indicators of carbon performance.
Keyword Cost of debt
Carbon emissions
Cost of debt
Carbon awareness
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
UQ Business School Publications
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Created: Mon, 13 Jun 2016, 20:22:14 EST by Karen Morgan on behalf of UQ Business School