Corporate Climate Investments and Their Impact on Financing Decisions: Evidence From Leading Firms in the Brown Economy

Abstract

This study explores the supporting dynamics of the trade-off notion and Porter's win–win hypothesis by conducting an empirical analysis between corporate climate investments (CCI) and strategic financial management approaches. For this purpose, we consider Chinese A-shares listed corporations from 2010 to 2022. Utilizing a two-step system generalized method of moment (GMM) for regression analysis; the findings reveal an inverse relationship between CCI and debt financing approach (DFA) because financial institutions incorporate environmental risks into their lending decisions, leading to higher interest rates that deter corporations from leveraging debt. However, a notable and positive correlation exists between the CCI and the equity financing approach (EFA). This relationship arises because investments in climate-related initiatives significantly enhance a corporation's public image, demonstrating its commitment to environmental sustainability and social responsibility. Such actions foster investor goodwill and trust, aligning with broader sustainable development goals. Consequently, this alignment renders the EFA increasingly appealing to investors. These findings highlight the strategic importance of CCI in contemporary corporate finance, underlining their twofold capacity to foster corporate and environmental sustainability. Moreover, this study challenges the traditional Trade-off paradigm, which posits that companies must choose between environmental sustainability and economic performance. In contrast, it supports Porter's win–win hypothesis, advocating for an integrated corporate strategy that aligns environmental and economic sustainability, highlighting the potential for businesses to achieve both objectives simultaneously.