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The role of financing constraints and environmental policy on green investment

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  • Costa, Helia
  • Demmou, Lilas
  • Franco, Guido
  • Lamp, Stefan

Abstract

Despite ambitious carbon reduction targets set by policymakers worldwide, current investments fall well short of the net-zero emissions scenario. This paper investigates the impact of financing constraints (FCs) on green investment among large, publicly listed firms across diverse sectors and countries. We find that FCs significantly reduce the propensity to undertake green investments by 2.5 percentage points. This result is even more pronounced in a difference-in-differences framework when focusing on the exogenous increase in financing costs resulting from the Great Financial Crisis of 2007/08. The study reveals further that the negative impact of FCs can be reduced by market-based environmental policies.

Suggested Citation

  • Costa, Helia & Demmou, Lilas & Franco, Guido & Lamp, Stefan, 2024. "The role of financing constraints and environmental policy on green investment," Economics Letters, Elsevier, vol. 239(C).
    • Handle: RePEc:eee:ecolet:v:239:y:2024:i:c:s0165176524002246
    DOI: 10.1016/j.econlet.2024.111741
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    References listed on IDEAS

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    1. Schauer, Catharina & Elsas, Ralf & Breitkopf, Nikolas, 2019. "A new measure of financial constraints applicable to private and public firms," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 270-295.
    2. Hélia Costa & Lilas Demmou & Guido Franco & Stefan Lamp, 2024. "Making the grass greener: The role of firm’s financial and managerial capacity in paving the way for the green transition," OECD Economics Department Working Papers 1791, OECD Publishing.
    3. Tobias Kruse & Antoine Dechezleprêtre & Rudy Saffar & Leo Robert, 2022. "Measuring environmental policy stringency in OECD countries: An update of the OECD composite EPS indicator," OECD Economics Department Working Papers 1703, OECD Publishing.
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    5. Annalisa Ferrando & Alessandro Ruggieri, 2018. "Financial constraints and productivity: Evidence from euro area companies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 23(3), pages 257-282, July.
    6. Accetturo, Antonio & Barboni, Giorgia & Cascarano, Michele & Garcia-Appendini, Emilia & Tomasi, Marco, 2022. "Credit supply and green Investments," CAGE Online Working Paper Series 615, Competitive Advantage in the Global Economy (CAGE).
    7. Peter N. Gal, 2013. "Measuring Total Factor Productivity at the Firm Level using OECD-ORBIS," OECD Economics Department Working Papers 1049, OECD Publishing.
    8. Ferrando, Annalisa & Altomonte, Carlo & Blank, Sven & Meinen, Philipp & Iudice, Matteo & Felt, Marie-Hélène & Neugebauer, Katja & Siedschlag, Iulia, 2015. "Assessing the financial and financing conditions of firms in Europe: the financial module in CompNet," Working Paper Series 1836, European Central Bank.
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    Cited by:

    1. Xiaomin Lyu & Qiongwen Zhang, 2024. "Navigating Environmental Tax Challenges: Business Strategies for Chinese Firms Sustainable Growth," Sustainability, MDPI, vol. 16(17), pages 1-21, August.

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    More about this item

    Keywords

    Green investment; Financing constraints; CO2 emissions; Environmental policy stringency;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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