Climate action and cost of equity: examining the relationship between environmental initiatives and equity financing of European companies

Abstract

This thesis investigates the relationship between climate action and the cost of equity (CoE), analyzing data from 289 European firms (2018-2022). Climate action is represented by emission intensity, waste intensity, and renewable energy share. The adjusted Fama-French model identifies positive factor loadings for sustainable portfolios, indicating systematic sustainability risk premia and an associated CoE increase. In contrast, unsustainable portfolios exhibit negative factor loadings, resulting in lower CoE values. The finding for emission intensity is supported by the hybrid firm-level approach, developed in this thesis and employing panel data regression. These results suggest dual investor behavior and further research.