The influence of carbon risk on cost of capital: Empirical evidence from China

Abstract

This study investigates the impact of carbon risk on corporate financing, with a particular focus on the cost of equity (CoE), cost of debt (CoD), and weighted average cost of capital (WACC) of Chinese companies. This study uses a sample of 499 companies in the S&P 500 China Index from 2015 to 2022 and uses carbon emissions as a proxy for carbon risk. The results show that the higher the carbon emissions, the lower the cost of capital (including CoE and CoD). In addition, carbon emissions have no significant impact on systemic risk, while ownership of high-emitting companies tends to be more dispersed. This study highlights the uniqueness of China’s financial market, namely that environmental risks have not been fully incorporated into financial assessments. These insights highlight the need to strengthen environmental supervision and promote green finance in China to better internalize carbon risks and achieve sustainable development.