How Climate Change Shapes Capital Structure and Corporate Payout Decisions

This chapter examines how climate change reshapes corporate capital structure and payout decisions, bridging traditional financial theories with the realities of a decarbonizing economy. Building on earlier discussions of climate risk (Chap. 7 ) and the Weighted Average Cost of Capital (Chap. 8 ), it explores how climate-related risks and opportunities alter firms’ financing strategies and shareholder engagement. Key capital structure theories—such as trade-off, pecking order, and agency theory—are revisited in light of the financial constraints imposed by climate uncertainty, including regulatory pressures, investor preferences, and credit rationing. Firms in carbon-intensive sectors face declining leverage due to higher borrowing costs and constrained access to capital, while green firms often benefit from lower financing costs and access to sustainability-linked instruments like green bonds. The chapter also highlights the role of financial flexibility in navigating climate risks, emphasizing shifts in dividend policies, share repurchases, and cash holdings. These decisions reflect firms’ need to balance short-term shareholder returns with long-term investments in sustainability and resilience. By integrating theoretical insights with practical examples across industries, this chapter provides a comprehensive framework for understanding how climate change influences corporate financing, positioning firms to adapt to the challenges and opportunities of a low-carbon future.