Firms and climate change: a review of carbon risk in corporate finance

Abstract

This paper provides an overview of financial economics-based research on carbon risk with an emphasis on corporate finance. In the corporate finance literature, carbon risk refers to the impact of society’s transition to a low-carbon economy on firm value due to tightening regulations, changing consumer preferences, reputational damage, etc. We focus on the links between carbon risk and different firm performance factors, such as firm risk, cost of capital, financial performance, firm value, and corporate decisions. Although research on carbon risk is still emerging in the corporate finance field, the amount of literature on this topic has been increasing, especially in the last 2 years. We find that some results are robust, while others are mixed. This indicates that conflicting hypotheses still exist, leading to a need for more in-depth exploration.