The role of climate vulnerability in shaping capital structure decisions: an Analysis on Emerging Economies

This thesis explores how climate vulnerability influences the financial decisions of companies in emerging markets, focusing on firms in India and Brazil. While traditional capital structure theories explain how companies balance debt and equity, they often overlook the growing impact of climate risks. This study aims to bridge that gap by considering how a country’s ability to adapt to climate change, measured through the ND GAIN index, affects firms’ access to capital and their financing costs. Using data from 2012 to 2021 and focusing on three climate-sensitive sectors, agriculture, energy, and manufacturing, the research applies panel data analysis to examine how climate resilience and broader economic conditions shape financial outcomes. The results show that while climate resilience does not significantly affect the cost of equity, it is associated with higher borrowing costs. This surprising result suggests that lenders may interpret improvements in climate readiness as signs of upcoming regulatory costs or stricter environmental standards. By connecting concepts from corporate finance and climate risk, this thesis offers a more complete understanding of how companies adapt their financial strategies in response to environmental challenges. It also provides practical recommendations for policymakers, investors, and corporate leaders on how to build financial resilience in a world where climate risks are becoming part of everyday business decisions.