Sustainability and entrepreneurial finance: how does climate risk affect startup financing and valuations?

Purpose This study examines the impact of climate risk exposure and sustainability disclosures on financing conditions of European startups. It seeks to understand how environmental considerations shape entrepreneurial finance in an increasingly sustainability-driven economy. Design/methodology/approach The research employs fixed effects panel regressions on a European startup dataset from 2016 to 2023. Key variables analyzed include loan spreads, pre-money valuations scaled by total assets, carbon emissions per capita, climate event exposure, firm-level sustainability disclosures, and relevant firm-specific and macroeconomic controls. Findings Startups in high-emission economies and climate-vulnerable regions experience significantly higher loan spreads and lower pre-money valuations. Conversely, firms engaging in transparent sustainability disclosures benefit from reduced borrowing costs and enhanced valuations, indicating lender and investor preference for proactive ESG engagement. Results highlight firm size, R&D intensity and founder experience as additional influential factors positively associated with favorable financing outcomes. Research limitations/implications The study highlights the importance of integrating climate risks and sustainability disclosures into entrepreneurial financial modeling. Future research could explore industry-specific impacts of climate risk and further investigate the effectiveness of policy interventions in mitigating observed financing disparities. Practical implications Policymakers are encouraged to develop targeted incentives, standardized ESG reporting frameworks, and resilience-enhancing financial instruments to improve access to funding for startups, especially those vulnerable to climate risks. Adopting transparent ESG practices can enhance entrepreneurs’ financial attractiveness and competitive advantage. Originality/value This research provides novel empirical evidence linking climate risk and ESG disclosures explicitly to European startup financing conditions, thereby filling a critical gap in the entrepreneurial finance literature regarding sustainability-driven capital allocation.