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Climate Risk and Its Impact on the Cost of Capital—A Systematic Literature Review

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  • Luis Ángel Meneses Cerón

    (Department of Finance, Universidad Cooperativa de Colombia, Popayán 190001, Colombia
    Faculty of Economic Sciences, Universidad de San Buenaventura Cali, Cali 760001, Colombia)

  • Aaron van Klyton

    (Department of Management, Kean University, Union, NJ 07083, USA)

  • Albano Rojas

    (Faculty of Economic Sciences, Universidad de San Buenaventura Cali, Cali 760001, Colombia)

  • Jefferson Muñoz

    (Deparment of Finance, Universidad Antonio José Camacho, Valle del Cauca 760007, Colombia)

Abstract

As climate change intensifies the frequency and severity of its adverse events, there is growing concern about its impact on the economy, particularly in financial markets and corporate financial management. This study addresses this gap through a systematic literature review in Scopus according to the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) method, aiming to analyse how climate risk affects the Weighted Average Cost of Capital (WACC) and, consequently, corporate investment and financing decisions. The findings reveal that companies with negative environmental profiles face higher capital costs and loan interest rates. The cost of capital is crucial in the fight against climate change, highlighting the need for sustainable financial policies and investments. Therefore, it is essential to implement policy interventions that reduce these costs, which requires a radical transformation of existing financial frameworks, the promotion of innovative instruments, and the strengthening of financial markets through an integrated approach that links climate finance with economic and social development.

Suggested Citation

  • Luis Ángel Meneses Cerón & Aaron van Klyton & Albano Rojas & Jefferson Muñoz, 2024. "Climate Risk and Its Impact on the Cost of Capital—A Systematic Literature Review," Sustainability, MDPI, vol. 16(23), pages 1-21, December.
    • Handle: RePEc:gam:jsusta:v:16:y:2024:i:23:p:10727-:d:1538420
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    References listed on IDEAS

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