Enhancing borrowing-firm equity through renewable energy adoption, consumer green awareness, and insurer sustainable finance

Abstract

Small and medium-sized manufacturers increasingly adopt renewable energy sources for sustainable production but often require funds from financial institutions that prioritize sustainability. This study develops a capped call option model to evaluate an insurer's equity while considering the credit risks associated with a manufacturing borrower's renewable energy adoption. The study finds that a win-win situation can be achieved through renewable energy adoption with sustainable finance, with the insurer's interest margin and the manufacturer's equity value increasing. Furthermore, consumer green awareness also contributes to a win-win situation. However, implementing a stringent regulatory cap under the cap-and-trade mechanism can negatively impact the win-win structure, despite yielding insurance stability. The results suggest that when regulatory authorities conduct a cap-and-trade scheme, sustainable finance providers and manufacturing borrowers are more likely to contribute to environmental improvement through renewable energy adoption for production. Overall, this study highlights the potential benefits of renewable energy adoption and sustainable finance for manufacturers and insurers, as well as the positive impact of consumer green awareness. The findings can inform policymakers and market players in developing effective strategies to promote sustainable production and financial stability.