Firm Climate Risk, Risk Management, and Bank Loan Financing

Henry He HUANG, Joseph KERSTEIN, Chong WANG*, Feng Harry WU

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

1 Citation (Scopus)

Abstract

Research summary
We estimate firm-level physical risk from climate change based on managerial evaluation and firms’ exposure to climate hazard events and find that climate risk results in unfavorable corporate financing terms related to bank loans (higher interest paid, higher likelihood of being required to collateralize the loan, and greater number of covenant constraints). Firms that take measures aimed at managing climate risk, including corporate climate strategy, board-level governance, specific or integrated process to cope with climate change, climate opportunities, and climate policy involvement, are able to mitigate the negative impact of climate risk on loan contracting. We further find that higher climate risk level is associated with inferior financial performance and higher default probability, which potentially lead to more stringent loan terms.

Managerial summary
We examine how a firm’s exposure to climate risk affects its financing terms from bank loans. Climate risk exposure is assessed by firm managers and also reflects the degree to which the firm is subject to climate-induced natural disasters. The results show that, if exposed to higher climate risk, which hurts financial performance and heightens default likelihood, firms face higher interest rates and more stringent collateral and covenant constraints when borrowing from banks. Nevertheless, firm managers could significantly mitigate this adverse climate impact on loan financing by integrating climate change into business strategy, having the board take direct responsibility for climate change issues, establishing a climate change-focused risk management process, seeking business opportunities from climate change, and engaging in activities that influence climate policies.
Original languageEnglish
Pages (from-to)2849-2880
Number of pages32
JournalStrategic Management Journal
Volume43
Issue number13
Early online date15 Jun 2022
DOIs
Publication statusPublished - Dec 2022

Bibliographical note

Funding Information:
HKIBS Research Seed Fund, Faculty of Business, Lingnan University, Grant/Award Number: 190‐008; Start‐up fund of Hong Kong Polytechnic University Funding information

Funding Information:
The authors are grateful for helpful comments from Aaron Chatterji (editor), two anonymous reviewers, Brian Bratten, Nicole Jenkins, Yue Ma, Linda Myers, Florin Vasvari, Hong Xie, Teri Yohn, Jian Zhou, and seminar participants at Hong Kong Polytechnic University, University of Kentucky, and Yeshiva University. Chong Wang acknowledges research support from start‐up fund of Hong Kong Polytechnic University and Feng (Harry) Wu acknowledges research support from HKIBS Research Seed Fund, Faculty of Business, Lingnan University. The authors contributed equally and the authorship is listed alphabetically. All errors are our own.

Funding Information:
The authors are grateful for helpful comments from Aaron Chatterji (editor), two anonymous reviewers, Brian Bratten, Nicole Jenkins, Yue Ma, Linda Myers, Florin Vasvari, Hong Xie, Teri Yohn, Jian Zhou, and seminar participants at Hong Kong Polytechnic University, University of Kentucky, and Yeshiva University. Chong Wang acknowledges research support from start-up fund of Hong Kong Polytechnic University and Feng (Harry) Wu acknowledges research support from HKIBS Research Seed Fund, Faculty of Business, Lingnan University. The authors contributed equally and the authorship is listed alphabetically. All errors are our own.

Publisher Copyright:
© 2022 John Wiley & Sons Ltd.

Keywords

  • firm climate risk
  • climate risk management
  • bank loan terms
  • financial performance
  • credit risk

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