Financing the green transition: evidence from climate regulations worldwide

I investigate the effects of climate laws on the capital structure of firms worldwide. My results indicate that in the aftermath of the introduction of climate legislations, firms tend to maintain higher leverage. This trend is particularly noticeable among firms with higher greenhouse gas (GHG) emissions, those with substantial exposure to climate risk opportunities, and those situated in countries characterized by a low Uncertainty Avoidance index, a high Individualism index, robust environmental law enforcement, and heightened public awareness of corporate social responsibility (CSR)issues. Furthermore, I find that companies with high GHG emissions are more inclined to tie executive compensation to environmental, social, and governance (ESG)performance following the enactment of climate-related legislations. Such compensation structures linked to ESG performance after the introduction of climate legislation enhance a firm’s investment in green R&D. These firms show a preference for debt financing to support their green initiatives. Lastly, I find that climate laws reduce the debt maturity, profitability, and value of companies.