Firm carbon risk exposure and financial stability

This research investigates the influence of firm-level carbon risk on financial stability. Using a global sample of non-financial firms, we find that carbon risk negatively impacts financial stability. Financial constraints, corporate governance, and environmental innovation moderate this effect. The impact is stronger for firms with low R&D intensity and those in countries with high CO2 emissions, weak rule-of-law, low control of corruption, no carbon regulation, and low environmental regulation. Further tests show stronger effects in developing economies and in the post-global financial crisis and Paris Agreement periods. The findings highlight the need for tailored strategies to manage carbon risks.