Cost of capital and climate risks

Cost of capital is a key element for corporate financing and investment decisions. The growing relevance of climate change, and more broadly, environmental sustainability suggests that managerial decisions that improve corporate environmental footprint and risks might be priced by investors, thus reducing the cost of capital for global companies. The objective of this paper is to survey the literature contributions that have investigated - theoretically and empirically - the relationship between environmental performance and firms' cost of capital. The surveyed papers mostly support the existence of a negative relationship between environmental performance and cost of capital: better environmental performance leads to a lower cost of capital. However, several external factors, including the national institutional and cultural frameworks, seem to have a considerable effect on this relationship, with the reasons being unclear. New avenues of research should investigate in-depth those factors, gather evidence from understudied countries, and examine the practices that allow corporations and investors to embed sustainability considerations in cost of capital metrics.