Does climate risk intensify financing constraints? Evidence from investment-cash flow sensitivity

Purpose This study examines whether climate change risk (CCR) increases investment-cash flow sensitivity (ICFS), indicating greater financing constraints that force firms to rely more heavily on internal funds for investment. Design/methodology/approach We analyze 26,029 firm-year observations from 74 countries over 2001–2020, using climate risk measures from earnings call transcripts and interaction regression models. Findings Climate risk significantly reduces investment and substantially increases investment-cash flow sensitivity, indicating climate-exposed firms become more dependent on internal financing. This effect is significantly stronger among financially constrained firms, concentrated during financial stress periods and in emerging markets, and driven primarily by regulatory transition risks rather than physical climate risks. Practical implications Firms should prioritize financial flexibility through conservative leverage, while investors should incorporate climate-induced financing constraints into risk assessments, particularly for emerging market exposures. Policymakers should accompany transition regulations with targeted financial support for constrained firms and credible policy roadmaps. Originality/value This study provides the first international evidence that climate risk fundamentally reshapes investment-financing relationships by increasing dependence on internal funds, with amplified effects among vulnerable firms and in emerging markets. We establish financial constraints as the primary transmission channel through which climate risk affects corporate investment.