Carbon Risk and Cost of Debt: The Role of Board Gender Diversity

ABSTRACT Carbon emissions expose firms to regulatory, reputational, and financial risks that increasingly influence borrowing conditions. Using 9560 firm‐year observations from 1195 European and US firms between 2016 and 2023, this study examines how carbon risk affects the cost of debt and whether board gender diversity moderates this relationship. The results indicate that firms with higher carbon risk face significantly higher borrowing costs, reflecting lenders' sensitivity to carbon risk uncertainties. However, gender‐diverse boards mitigate this effect, reducing lenders' perceived risk and weakening the positive link between carbon exposure and debt costs. Robustness checks using alternative measures of carbon risk, the cost of debt, instrumental‐variable estimation, system GMM, and critical‐mass analyses support these findings. Overall, the study emphasizes the important role of board gender diversity in shaping lenders' assessment of carbon risk and offers insights for investors, creditors, regulators, and firms managing carbon‐related financial challenges.