Climate Change Is Rewriting the Rules of Corporate Finance

Companies that invest in the green transition also have a competitive advantage in financial terms: they are able to adapt their capital structure quicker, improving access to markets and reducing the cost of debt. In contrast, companies that are more exposed to transition risks (such as stringent regulations and regulatory uncertainty) see their financing capacity restricted.

These are the main findings of the study Climate Transition and the Speed of Leverage Adjustment, published in the International Review of Financial Analysis by Maurizio Dallocchio and Francesco D’Ercole (both of Bocconi) and Domenico Frascati and Massimo Mariani (of Lum University). The study, based on an analysis of 849 companies listed in the S&P Global 1200 index between 2010 and 2022, shows how exposure to climate change directly affects the speed with which companies adjust their leverage.

Green investment helps rebalance capital

The analysis shows that companies at the forefront of the transition to a low-carbon economy benefit from higher Speed of Adjustment (SOA) leverage. This means they are able to rebalance their debt more efficiently, reducing the costs associated with raising external capital.

“Companies that integrate sustainability into their investment strategies not only improve their reputation, but also reduce their cost of capital by gaining easier access to financial markets,” explains Maurizio Dallocchio, Bocconi professor of corporate finance. “This is a key lever for those who want to successfully position themselves in the market of the future.”

Companies that invest in renewable energy, energy efficiency, and sustainable mobility thus have privileged access to capital because they are perceived as less risky by institutional investors and banks.

Transition risk handicaps the most indebted firms

On the other hand, firms in carbon-intensive sectors that are more exposed to regulatory risks, such as mining and transportation, are struggling to rebalance their leverage. “These companies face high compliance costs and regulatory uncertainty, which reduces their ability to access capital markets,” Dallocchio points out.

According to the study, companies most exposed to transition risk are often forced to issue equity rather than take on new debt because investors demand higher spreads to offset the risk. This effect became even more pronounced after the 2015 Paris Agreement, which reinforced regulatory pressures on high-emission sectors.

The role of regulatory authorities

Another key aspect of the study concerns the role of regulators in facilitating the green transition. “A clear and stable regulatory framework is essential to ensure that companies can plan for long-term sustainable investments,” Dallocchio notes. Tax incentives, subsidies for green investments, and greater transparency in corporate climate strategies are crucial tools for accelerating the adjustment of corporate leverage.

Methodology

The study uses a two-stage partial adjustment model to measure how quickly firms change their leverage in response to climate risks and opportunities. In the first stage, the authors estimate the target level of leverage for each firm, based on a number of firm and industry variables. In the second stage, they study how firms actually approach this target, considering the influence of climate and regulatory factors. This approach allows them to distinguish between passive and active adjustments, providing a more accurate view of the impact of the ecological transition on corporate finance.

Differences between sectors

The analysis shows that the impact of climate change on leverage varies considerably across sectors. Companies in the mining sector appear to be among the most exposed to transition risks, with high difficulty in accessing capital due to increasing regulatory pressure. In contrast, companies in the construction sector have strong exposure to both transition-related risks and opportunities, signaling that corporate strategies are crucial in determining the overall effect.

Macroeconomic factors and stability of outcomes

The study controls for a number of macroeconomic factors, such as GDP growth and inflation, to ensure the robustness of the results. This allows variations in the speed of leverage adjustment to be ruled out due to economic cycles rather than factors related to climate change. Moreover, the results remain valid even when alternative econometric methods are applied, confirming the robustness of the analysis.

Conclusions and the possible impact of Donald Trump’s policies

Researchers show that climate change is not only an environmental challenge, but also a determining factor for corporate financial strategies. Investing in the ecological transition is not only a matter of social responsibility, but a winning choice for companies that want to ensure long-term stability and growth.

However, the regulatory framework is constantly evolving and could undergo significant changes with the policies of Donald Trump, who is known for his skeptical stance on green transition. “If the new political course in the United States were to reduce incentives for sustainability and loosen carbon regulations, companies most exposed to the transition could find themselves in a more vulnerable position,” Dallocchio warns. “On the other hand, those who have already invested in renewable energy and sustainability may be less affected by these changes, showing that integrating sustainability into financial strategy remains a winning move in the long run.”