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The latest research indicates that businesses burdened with existing debts experience the most significant impact from climate change.

Climate change presents the most significant risks to the most vulnerable individuals, and the same holds true for businesses. Highly leveraged companies, those with excessive debt, are particularly susceptible to the impacts of climate shocks, according to our forthcoming study in The Review of Corporate Finance, which analyzed data from over 2,500 publicly listed U.S. companies over a 16-year period.

As scholars specializing in climate finance and corporate governance, our aim was to comprehend how climate change affects businesses and how stakeholders—individuals with a vested interest in a company’s success, such as consumers, employees, and investors—respond to it.

Together with our colleagues Sadok El Ghoul at the University of Alberta and Omrane Guedhami at the University of South Carolina, we conducted a study to investigate how climate risk influences indebted companies.

We discovered that climate change delivers a dual blow to highly leveraged firms by exacerbating the costs imposed on them by stakeholders.

Take consumers, for instance. Previous research has shown that climate change can prompt people to alter their purchasing behaviors—opting for more environmentally friendly products or participating in boycotts. While shifting consumer preferences present a challenge to all businesses, it’s more challenging for a heavily indebted company to adapt.

Our study supported this notion. Two years after facing significant exposure to climate change, highly indebted firms experienced an average decline in sales growth of approximately 1.4%, translating to an average loss of $59.7 million per company.

Investors also express concerns about climate change, our research found. Companies exposed to climate risk face the risk of financial and operational disruptions that may deplete lenders’ funds, especially for firms already burdened with high debt. Examining capital issuance within our sample of companies, we observed that climate exposure led to an average reduction of around $457 million in net debt issuance per firm—new debt minus retired debt. This poses an additional challenge for indebted businesses seeking to raise funds.

The significance of this lies in the long-established understanding among researchers that indebted companies face heightened risks of product failures and market share losses during economic downturns. Excessive debt levels can even lead companies out of business, as some analysts argue occurred with Toys R Us.

Our research indicates that climate change, predicted by the World Economic Forum to jeopardize approximately 2% of global financial assets by 2100, will push already vulnerable companies to the edge. This underscores the substantial and uneven impacts that global warming will impose on businesses, emphasizing that the most fragile firms are poised to experience the most severe consequences.

Looking ahead, our study underscores the disproportionate effects of climate change on financially fragile businesses. Our future research plans involve exploring the impact of climate change on firms’ business behaviors, particularly in terms of their ethical conduct.

In terms of climate solutions, one of our team members, Huan Kuang, has demonstrated how companies can leverage innovation to mitigate their climate vulnerabilities. In a working paper co-authored with Bing Liang of the University of Massachusetts Amherst, we found that every 1% increase in climate-related innovation, as measured by patent data, reduces firm-level carbon emissions growth by around 100,000 metric tons.

However, indebted firms may be hesitant to invest in new technologies without some encouragement. This emphasizes the crucial role of policy incentives for success, and further research is required to determine their optimal form.

Moreover, climate change could yield more intricate economic consequences than commonly understood. For instance, if it compels non-viable companies out of business, it could be beneficial for the economy – at least in theory, as explored in a recent paper by one of our team members, Ying Zheng.

While numerous questions remain unanswered, it is evident that climate change will exert significant and diverse effects on the future of business. We encourage other researchers to delve deeper into this topic.

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