Carbon performance and financial debt: Effect of formal and informal institutions

Abstract

AbstractClimate change has led to a transformation of the economy, with institutions such as the European Commission pushing for decarbonization. Using a sample of 4607 European‐listed firms from 2005 to 2019, we find evidence that political and financial factors moderate the relationship between carbon performance and financial debt. Environmentally responsible firms operating in countries with better democratic values, associated with higher degrees of freedom and law enforcement, are favored with more access to debt. Similarly, better carbon performers obtain more debt in countries with concentrated banking markets, greater financial stability, and lower government debt. Furthermore, the cultural factors uncertainty avoidance and long‐term orientation moderate the relationship between carbon performance and financial debt, as well as the effect of political and financial institutions on this relationship. These results show the relevant role formal and informal institutions play in facilitating the decarbonization of firms, as well as the importance of coordinating European policies.