Essays on sustainable finance

Abstract

Climate change has rapidly become one of the most pressing global crises of our time, posing significant physical and regulatory risks to firms across the world. This thesis explores the various impacts of climate-related risks on firms, including corporate operations, talent retention, and financial adjustments. Specifically, I investigate how climate-related risks affect international mergers and acquisitions, turnovers of innovative talents throughout the U.S., and trade credit dynamics among U.S. companies.

Governments worldwide have adopted numerous regulations aimed at mitigating and adapting to climate change. Despite this effort, individual countries may not have strong incentives to enforce climate regulations strictly due to the fact that climate is a global public good, which means that climate issues are not bound by national borders. As a result, it is unclear whether these regulations have an impact on key corporate decisions. My coauthors and I tackle this question in the first chapter of this thesis by examining how climate regulations affect cross-border mergers and acquisitions, that is, the international market for corporate control. We find that foreign acquirers are less likely to pursue targets in countries that have enacted climate laws and that deals announced shortly before the enactment of climate laws are more likely to be withdrawn. Furthermore, cross-border deals feature smaller synergies, lower premiums, and less post-merger operating performance improvement after target countries enact climate laws. We uncover support for three potential mechanisms through which climate regulations affect cross-border acquisitions, including impeding synergy creation, deterring carbon leakage through regulatory arbitrage, and selective enforcement. Overall, our findings suggest that national climate regulations can hinder cross-border acquisitions and, thereby, international capital and resource reallocation.

Next, I turn my attention from the allocation of physical capital to the reallocation of human capital, which is another factor that drives the growth of firms and the economy. The second chapter of this thesis examines how firms' climate change exposures affect the mobility and productivity of their innovative employees in the United States. By analyzing climate exposures extracted from conference call transcripts using machine learning, I find that departure rates of inventors are higher for firms that are more exposed to physical climate shocks. After the departure of such high-skilled workers, firms' innovative productivity declines and subsequent patents become less valuable. Moreover, such a brain drain effect is more pronounced among inventors who are more concerned about climate change and when climate awareness is higher. These results indicate that corporate physical climate exposure has a significant impact on the mobility of talents across firms and the value of innovative human capital.

My third chapter examines how U.S. companies adjust their financial policies in response to local climate regulations. It focuses on the adjustment of trade credit, one of the primary sources of external financing for firms of various scales. Exploiting the staggered adoption of climate action plans by U.S. state governments, I find that firms use substantially more trade credit following the implementation of these plans. This effect is particularly pronounced among carbon-intensive firms. Moreover, financially constrained firms, firms lacking short-term financial liquidity, and firms with high distress risk experience the most significant increase in trade credit utilization. These findings suggest that climate action plans affect trade credit usage by imposing financial burdens. In contrast to the increased trade credit usage, there is no change in trade credit extended by firms to their customers, leading to a notable decline in net trade credit provision.

In summary, the analyses conducted in this thesis highlight the significant impact of climate change risks on various aspects of corporate decision-making, including cross-border mergers and acquisitions, talent retention, and financial policies such as trade credit. The results provide valuable insights for corporate managers who are seeking to understand the implications of climate change for their businesses and develop strategies to mitigate associated risks. Moreover, the findings are also useful for regulators who are responsible for developing policies that aim to address climate change and its impacts on the economy and society. Policymakers can use these insights to design policies that incentivize firms to adopt climate-friendly practices and mitigate the risks associated with climate change, while also encouraging innovation and growth in the business sector. Ultimately, this thesis contributes to a better understanding of the relationship between climate change and corporate decision-making and emphasizes the importance of addressing climate change for the long-term sustainability of businesses and the economy.