The impact of carbon risk on the cost of debt in the listed firms in G7 economies: The role of the Paris agreement

The Paris Agreement, signed in 2015, sets ambitious goals for diminishing greenhouse gas emissions and restricting the rise in global temperature to achieve a less carbon-intensive and climate-resilient global economy. The Paris Agreement marked a defining moment in the worldwide response to global warming and has significantly affected the financial sector. Given this background, this research explores the effects of carbon risk on the cost of debt (CoD) in 1428 listed firms across seven economies from 2011 to 2020. The paper also reflects the post-Paris Agreement's involvement and the ESG factors' moderating effect in the empirical models. The study finds a significant impact of carbon risk on CoD following the implementation of the Paris Agreement. Notably, companies with higher carbon risk face higher borrowing rates. However, the effect of ESG on moderating the relationship between carbon risk and CoD is found to be insignificant. Further analyses confirm this finding, as individual pillars of ESG (governance and social aspects) also show insignificant moderating effects. • We investigate the impact of carbon risk on the cost of debt in G7 economies. • Data from 1428 listed firms in G7 economies from 2011 to 2020 is used. • Significant effect of carbon risk on the cost of debt post-Paris Agreement. • Companies with higher carbon risk face higher borrowing costs. • ESG has no significant moderating impact on carbon risk and the cost of debt.