Financing Under Climate Uncertainty: Impact of Climate Risk on Debt Structure Decisions

Abstract

Geographical uncertainties comprising climate change influence financing decisions, specifically the choice of debt structure. This study investigates the impact of climate risk on debt structure choice, whether the debt structure is project finance or recourse loans. For this purpose, data for climate risk ranking country wise, and asset-based loans comprising project finance loans versus other loans collected for the period 2011-2018 resulted in 24,226 loan transactions from 92 countries. Using logistic regression, we find evidence that higher climate risk is associated with an increase in probability of debt structure choice to be project finance. The results contribute to the literature on climate change and debt financing. The study has implications for borrowers, lenders and policy makers.