Does Carbon Intensity Affect the Cost of Equity? An Empirical Study From Mexico

Abstract

Climate change poses significant risks for companies, particularly in emerging countries like Mexico, where sustainability perceptions are evolving. This study analyzes how carbon emissions affect the cost of equity capital (CoE) for Mexican firms. Data from 32 listed companies from 2018 to 2022 (N = 148 observations) was used, applying a panel regression model to assess the relationship between carbon intensity and CoE, controlled for financial variables. In addition to panel estimates, a complementary Random Forest analysis is used to provide evidence on the relative predictive relevance of carbon intensity vis-à-vis conventional financial determinants, and how this relevance changes across stable versus crisis conditions. Results show that carbon intensity is positively related to CoE, suggesting that firms reducing emissions could lower perceived risk and improve market value. However, this effect weakens during crises, such as the Covid-19 pandemic, when financial leverage becomes more relevant. No significant differences were found between low- and high-carbon industries. These findings contribute to Sustainable Development Goals 13 and 12 by highlighting how environmental performance influences corporate financing in emerging economies.