The financial impact of carbon risk and mitigation strategies: Insights from the automotive industry

The automotive industry is one of the most polluting manufacturing industries and one of the most important in terms of the workforce employed. Therefore, understanding the impact of climate change on this industry is of interest to policymakers, capital providers, and managers. To this end, this study provides insights into the financial impact of carbon risk and mitigation policies adopted by automobile companies. It adopts an accounting-based approach based on profitability ratios and a market-based perspective based on Tobin's q measures. The sample includes car manufacturers and component manufacturers, thus providing a comprehensive overview of the automotive industry along its supply chain. The results suggest possible difficulties in accessing capital in the future, or more expensive conditions, for higher-polluting firms, which are the most in need to make the transition to cleaner production. The findings indicate a robust and consistently negative association between carbon emissions and financial performance, which are related to lower returns on sales and capital inefficiency for higher-emitting firms. Evidence also suggests a negative impact of carbon emission mitigation strategies on financial performance measures, which increases with carbon risk. Results are not compelling for climate-related disclosure.