Does green direct financing work in reducing carbon risk?

How green direct financing represented by green bonds affects carbon risk is a topic of great significance. The impact of green indirect financing represented by green credit on carbon risk has been widely discussed, while the relationship between green bonds and carbon risk is yet to be explored. We examine the effect of green bond issuance (GBI) on the carbon risk of firms using the data of Chinese listed firms from 2009 to 2019. We find that GBI reduces firms' carbon risk. We verify the channels of energy efficiency and energy consumption structure through which GBI reduces firms' carbon risk. Furthermore, we also find that the negative effect of GBI on the carbon risk of firms is more pronounced for firms with lower GBI costs and a higher level of digital transformation. We are the first to prove the positive role of green direct financing in reducing carbon risk.