THE IMPACT OF CARBON RISK ON TRADE CREDIT

Abstract

Global climate change presents a growing danger to the environment, economies, and human population as well as disrupting sophisticated ecological systems. Several nations have enacted rules and measures to reduce and regulate firms' carbon emissions in response to these concerns. With the growing attention being paid to carbon emissions, corporations are increasingly concerned about their exposure to carbon risk. Indeed, investors are aware of carbon risk and require higher compensation to bear this risk (e.g., Bolton and Kacperczyk, 2021). This research paper aims to analyze the influence that carbon risk has on a companies' trade credit using a sample of selected companies in the US from 2001-2019. We argue that companies with high carbon risk are not well reputed, hence are less likely to obtain informal finance. Therefore, we anticipate a negative relationship between a company's carbon risk and trade credit. The findings we obtained are robust to a set of robustness tests and to addressing endogeneity issues. The results provide propositions for corporations and policymakers since it highlights the importance of reducing carbon risk for the the access to informal financing.