Climate Transition Risk and Debt Capital Costs: Empirical Evidence from the Energy and Utilities Sectors

Although transition risks from climate change, such as regulatory shifts, market disruption, consumer preferences, and evolving technologies, are increasingly acknowledged by financial institutions, most empirical research has focused on equity markets, leaving the impact on corporate debt markets underexplored. In particular, few studies have examined how different dimensions of transition risk affect the cost of debt (COD), especially across firms operating in high-emission sectors. This paper addresses this gap by investigating whether and how climaterelated transition risks are priced into the COD for international utilities and energy companies. Using a balanced panel dataset of 219 firms from 2012 to 2017, we propose a two-step approach. First, we apply principal component analysis to construct a multidimensional transition risk index. We identify two distinct components: a contemporaneous risk factor (called present risk) capturing firms’ existing energy portfolio composition and emission intensity, and a forward risk factor (called future risk) capturing future-oriented exposures such as fossil fuel reserves and investment patterns. Second, we use panel regression analysis, which shows that the current risk dimension significantly increases borrowing costs throughout the period whereas the future risk dimension exhibits statistical significance exclusively from 2015 onward, coinciding with rising investor awareness following the Paris Agreement. These findings contribute to the growing literature on climate finance by offering a nuanced understanding of how transition risks are internalized in corporate debt pricing.