Relationship between Climate Change Risk and Cost of Capital

In recent years, a global consensus has emerged on the importance of climate change risks. Climate change risk is also known to affect investment decision-making processes, such as those related to the issuance of Green Bonds and the use of ESG investment principles. Given this context, we examine whether there is a relationship between the cost of capital and climate change risk, by focusing on companies under the Target Management Scheme in Korea. Companies with high levels of greenhouse gas emissions or energy use are more likely to be exposed to the uncertainty related to future climate change risks. We measure the climate change risks faced by companies using information on greenhouse gas (GHG) emissions and energy consumption of companies that were announced in the Korean GHG Information Center from 2011 to 2015. We use the weighted average cost of capital provided by NICE Credit Information Co. Ltd., as a proxy for cost of capital. We find that companies with higher risk of climate change have higher cost of capital. In addition, we show that there is a significant positive relationship between climate change risks and cost of capital in high climate change risk industries.