CLIMATE RISK TRANSPARENCY AND FIRMS’ INTEREST COVERAGE RATIO IN EMERGING MARKETS

Abstract

This study investigates whether financial markets in emerging economies impose a cost on firms that disclose climate change risks. By leveraging a novel firm-level dataset of climate risk disclosures from Thomson Reuters/LSEG Eikon, we analyze the relationship between voluntary disclosures of asset exposure to climate transition risk and physical risk and a firm’s interest coverage ratio. Using a System Generalized Method of Moments (System GMM) estimator, we address potential endogeneity and dynamic effects in the relationship between disclosure behavior and financing costs. Our results indicate that firms that disclose climate risk exposure face a higher cost of debt compared to their non-disclosing peers. This suggests that in the institutional context of emerging markets, creditors may interpret transparency as a sign of unmitigated vulnerability rather than a marker of sound governance. The study highlights a critical unintended consequence of climate disclosure, suggesting that regulatory efforts must be coupled with mechanisms that build market confidence in firms’ adaptive capacities to prevent transparency from inadvertently restricting access to capital.