Climate opportunity exposure and the cost of capital: Evidence from emerging market firms

Abstract

Purpose: Using a novel measure of firm-level exposure to climate opportunity from 2002 to 2022, this paper examines the impact of climate opportunity exposure on the cost of capital for nonfinancial listed firms in emerging markets. Design/methodology/approach: The study analyzes how climate opportunity exposure affects both the weighted average cost of capital and its components using regression models with industry, country and year fixed effects. The analysis uses multiple robustness approaches, including propensity score matching, entropy balancing and two-stage least squares. The study also investigates how the relationship varies across institutional factors, particularly countries' climate change vulnerability and readiness. Findings: One standard deviation increase in climate opportunity exposure reduces the weighted cost of capital by 1.58%. However, this effect is primarily driven by equity financing costs, with insignificant effects on the cost of debt, suggesting equity investors’ focus is on long-term climate-related value creation opportunities. The negative relationship is more pronounced in firms operating in countries with high climate change vulnerability and readiness. These findings highlight the financial value of climate opportunities and their varying impact across different institutional environments in emerging markets. Originality/value: This study examines an unexplored aspect of climate change – climate opportunity – and its financial implications in emerging markets. It introduces a novel measure of climate opportunity exposure and provides evidence that climate-related opportunities serve as unique resources for firms to demonstrate proactive climate risk management and gain a competitive advantage, particularly in economies facing significant climate challenges.