Environmental Performance and Financial Constraints in Emerging Markets

We examine how corporate environmental performance relates to financial constraints in an environment likely to face high global pressure to address climate change. Using multivariate regressions and a large dataset of over 8,500 firm-years from 24 emerging market countries during a period of 18 years from 2003 to 2020, we find superior environmental performance (especially relating to carbon emissions) to be associated with significantly lower levels of financial constraints. This finding is robust to an alternative measure of financial constraints, different sample compositions, and to endogeneity concerns. Further analyses reveal that the reductions in financial constraints are significantly higher for firms: (i) in high carbon-emitting countries; (ii) in countries that adopted the 2015 Paris Climate Agreement early; and (iii) that cross-list onto foreign stock exchanges. Finally, we provide evidence to suggest that the environmental aspects of a firm’s CSR efforts mitigate its financial constraints more than can be attained by the other major CSR dimensions. Overall, the findings imply that stakeholders of emerging market firms prioritise environmental concerns and, therefore, reward environmentally responsible firms with cheaper and easier access to financing, especially when global environmental concerns are high.