Assessing Corporate Responses to Climate Change Exposure and Environmental Sustainability: Empirical Evidence from Environmental Disclosure Practices, Environmental Investment Decisions, and Debt Financing Costs

Abstract

This thesis investigates how large European firms respond to climate change exposure through environmental disclosure, investment decisions, and financing outcomes. Three empirical studies were conducted using data from the STOXX 600 and FTSE 100 indices. The first study examines whether climate change exposure is associated with environmental disclosure practices. We find that higher climate exposure, risk, and positive sentiment are positively associated with disclosure, while negative sentiment suppresses it. The relationship is moderated by a range of CEO characteristics, specifically tenure, age, and gender, as well as by key environmental governance mechanisms, including ESG-linked executive compensation and environmental quality management systems (EQM). CEO tenure enhanced the positive effect of climate exposure and positive sentiment. Older CEOs tend to support stronger overall disclosure but respond differently depending on the tone of climate language as they reduce the influence of general climate exposure while softening the dampening effect of negative sentiment, and female CEOs strengthen the influence of climate risk and optimism. ESG-linked pay magnified both general climate change exposure and negative sentiment effects, while EQM increased transparency in risk contexts but dampened the influence of optimism on disclosure. The second study explores whether climate exposure leads to increased environmental capital investment. The findings suggest that such exposure acts as a forward-looking strategic signal encouraging environmental capital investment. However, the strength of this relationship was found to be weakened in firms with high financial performance or cash holdings. Moreover, institutional ownership did not consistently moderate this effect, indicating variation in investor engagement. The third study assesses how environmental performance influences the cost of debt. Results show that improved performance in emissions reduction and resource efficiency is associated with lower borrowing costs, while environmental innovation exhibited no significant financial impact. Rating discrepancies between ESG data providers were also observed to affect financial interpretation. The thesis contributes to understanding corporate environmental behaviour within the European context and offers insights into the financial implications of sustainability efforts. The findings hold relevance for policymakers, investors, and regulators aiming to support climate-aligned corporate strategies.