Conducted across 63 countries and covering nearly two decades of data (2003 – 2021), the research shows that non-financial firms in high-emission industries – such as manufacturing, transport and energy – face serious economic risks tied to their environmental impact.
While previous studies focused primarily on the financial sector, this is the first comprehensive global analysis demonstrating that climate-related risks also compromise the financial health of non-financial companies.
“The cost of inaction is now quantifiable,” said Dr Freeman Owusu, of Loughborough Business School. “Companies that continue to emit high levels of carbon are not only harming the environment – they are risking their own survival.”
Key Findings:
- Carbon emissions are a financial liability: Higher carbon risk – whether from direct emissions, indirect energy use, or toxic pollutants – was consistently associated with lower financial stability. This is due to increased operational costs, regulatory compliance burdens, reputational damage, and earnings volatility.
- The risk is systemic and global: The negative effect of carbon risk is stronger in:
- Firms operating in countries with high CO₂ emissions per capita
- Economies with weak rule of law, low control of corruption, and limited environmental regulation
- Firms with low R&D intensity or limited capacity for innovation
- Emerging and developing economies
- Financial stability is harder to maintain in a changing climate: Firms with high emissions tend to experience more volatile earnings, lower Z-scores (a key measure of financial health), and reduced investor confidence.
The study also explored which internal and external factors help firms reduce the financial impact of carbon risk. Among the most effective was having strong corporate governance, environmental innovation and robust financial resources.
These factors were especially effective in offsetting the effects of Scope 1 emissions (those generated directly by the firm).
However, Scope 2 and Scope 3 emissions (from purchased electricity or the firm’s supply chain) remain more difficult to control due to lower disclosure and reliance on external actors.
Dr Owusu said: “The findings send a clear message to corporate leaders, investors and regulators – that carbon risk is not just an environmental issue, it’s a core financial one.
“From rising compliance costs and regulatory risks to reputational damage and investor distrust, carbon emissions are no longer just an environmental issue – they are a serious business risk.
“Firms must act now to reduce their carbon footprint, invest in environmental innovation, and strengthen internal governance. The most resilient companies will be those that treat sustainability as a strategic priority, not a side issue.
“In a world shaped by climate change, long-term profitability depends on taking responsibility for emissions today.”
To reduce firm-level and systemic vulnerabilities, the study recommends:
- Stronger enforcement of environmental regulations
- Greater transparency in emissions reporting
- Support for clean technology R&D
- Institutional reforms in developing economies
The research draws from an extensive panel of global firm-level data, applying rigorous econometric techniques – including 2SLS, Propensity Score Matching, Entropy Balancing, and System GMM – to ensure the results are robust and free from statistical bias.
The consistency of the findings across multiple carbon risk measures and financial health indicators underscores the strength of the evidence.
This work marks a significant contribution to the field of sustainable finance, offering actionable insights for global stakeholders at the intersection of environmental responsibility and financial resilience.
The full paper, Firm carbon risk exposure and financial stability, is available in the journal, Financial Research Letters.
ENDS