How does climate regulatory risk influence labor employment decisions? Evidence from a quasi-natural experiment

Abstract

We exploit a green lending mandate as a quasi-natural experiment and estimate its effect on labor investment inefficiency of firms with high carbon risk. We document that heightened climate regulatory risk through mandatory green lending requirements motivates firms with higher carbon risk to adjust their labor investments to levels supported by economic fundamentals. We especially show that climate regulatory risk lowers labor investment inefficiency by curbing overinvestment in labor. This impact is more concentrated among firms that are more dependent on banks for liquidity, firms with severe financial constraints, and those with more institutional investors. After the green credit policy, we also observe an increase in bank lending costs and a reduction in loan maturities for carbon-intensive firms. Overall, our findings suggest that climate bank lending regulation is one of the major channels through which climate risks get embedded in labor employment decisions. In particular, green lending regulatory costs can have significant effects on corporate labor investment efficiency.