A series of studies have found a significant relationship between climate risk and corporate cash holdings in the US. Zhang (2024) and Gounopoulos (2018) both found that climate policy uncertainty and temperature change, respectively, are negatively associated with cash holdings. This suggests that firms increase their cash reserves in response to climate risk. Javadi (2020) further supports this, showing that the precautionary motive for holding cash is particularly strong for financially constrained firms. These findings are consistent with the precautionary motive framework and have important implications for corporate financial management in the face of climate risk.
Research on corporate cash policies under climate change in the US suggests that firms are increasing their cash holdings in response to climate risks (Gounopoulos, 2018; Javadi, 2020). This is particularly evident in financially constrained firms and those in high-carbon-emission industries. The precautionary motive for holding cash is a key driver of this trend. Additionally, climate policy risk is a significant consideration in firms' financial decisions, leading to more conservative capital structures (Dang, 2020). The role of voluntary corporate action on climate change, driven by business case logic, is also highlighted, with implications for bank practice and government policy (Bowman, 2013).
Research consistently shows that climate policy uncertainty has a significant impact on corporate cash holdings in the US. Zhang (2024) and Gounopoulos (2018) both find a negative association, with Zhang specifically noting a 2-year duration of this impact. This is further supported by Javadi (2020), who provides global evidence of increased cash holdings in response to climate risk, particularly among financially constrained firms. Duong (2018) adds to this by highlighting the role of cash holdings in mitigating the negative effects of policy uncertainty on firm activities, suggesting that these holdings serve as a buffer against uncertainty.
A series of studies have found a positive relationship between climate risk and corporate cash holdings in the US. Gounopoulos (2018) and Javadi (2020) both found that firms increase their cash reserves in response to climate risk, with the latter noting a particularly strong effect among financially constrained firms. However, Zhang (2024) found a negative association between climate policy uncertainty and cash holdings in the US tourism and hospitality sector, with the impact lasting for two years. Heo (2021) further supported the positive relationship, showing that firms with higher climate change exposure tend to hold more cash, particularly after the Paris Agreement. These findings suggest that climate risk can significantly impact corporate cash holdings in the US.
Research consistently shows that climate change has a significant impact on corporate cash holdings in the US. Gounopoulos (2018) and Javadi (2020) both find that firms increase their cash reserves in response to climate risk, with the effect being more pronounced for financially constrained firms. This is further supported by Yu (2022), who identifies a mechanism through which climate change increases the level of cash holdings in response to heightened operating risk. However, Zhang (2024) presents a contrasting view, suggesting that climate policy uncertainty is negatively associated with corporate cash holdings, particularly in the tourism and hospitality sector. This suggests that while climate change may lead to increased cash holdings, the uncertainty surrounding climate policy may have a dampening effect.

In an era marked by the escalating risks and uncertainties of climate change affecting global economic stability, discerning how these dynamics influence corporate financial strategies, especially concerning cash holding policies, is paramount. This review embarks on a critical examination of the nexus between climate policy uncertainty, climate risk, and corporate cash holding decisions, sourcing insights from a broad array of literature encompassing corporate finance, uncertainty, carbon finance, and climate regulations.

Javadi (2020) sets a pivotal foundation by illustrating that firms globally are bolstering their cash reserves as a precautionary measure against climate risk, a trend distinctly pronounced following the Stern Review’s release. This global outlook reveals a universal adaptation in corporate cash strategies against the backdrop of climate risk, pinpointing a direct correlation between climate risk exposure and the elevation of cash holdings. Through a detailed analysis involving datasets like PDSI, customer segment data, and Adaptive Capacity data, it becomes evident that firms located in jurisdictions with stringent environmental regulations or within sectors that are heavy carbon emitters, alongside financially constrained firms, are notably increasing their cash reserves. Such patterns indicate firms’ recognition of their climate risk exposure and their strategic recalibration of cash holdings to mitigate potential climate-induced financial impacts.

Delving into sector-specific dynamics, Zhang (2024) uncovers the nuanced impact of climate policy uncertainty within the U.S. tourism and hospitality sector, observing a negative relationship with corporate cash holdings. This insight underscores the variability in sectoral responses to climate policy uncertainty, where certain industries might trim cash reserves as a strategic adjustment for anticipated policy alterations. Aligning with this observation, Gounopoulos (2018) echoes the general trend of upticked cash holdings in the U.S. in reaction to climate risks, focusing on the pronounced role of temperature changes. This study highlights the amplified effect on financially constrained firms, socially responsible firms, and high-carbon-emission industries, suggesting a heightened perception of climate-related risks to operational stability and cash flows among these segments.

Broadening the scope, Yu (2022) explores how climate change is prompting an increase in corporate cash holdings, effectively managing risks. This trend is significantly evident in ecologically fragile areas, emphasizing the complexities of navigating operating risks amidst changing climate conditions. Similarly, Heo (2021) accentuates the intensified cash hoarding behavior of firms post-Paris Agreement, especially those with substantial climate change exposure, indicating a growing corporate apprehension towards climate-induced financial uncertainties.

The landscape of policy uncertainty intersecting with corporate financial strategies is meticulously mapped out by Duong (2018) and Dang (2020), who detail the deliberate adjustments in cash holdings and capital structures in anticipation of, or in response to, climate policy changes. These adjustments delineate not merely reactive measures but strategic positions aimed at safeguarding or capitalizing on policy-induced market evolutions.

Despite these rich insights, the literature presents several uncharted territories. The specific sectors experiencing a negative correlation between climate policy uncertainty and cash holdings, the disparate impacts of climate risks across different regions, and the underpinnings of increasing cash reserves—whether strategic or precautionary—are all areas yearning for deeper exploration. Moreover, contemplations on the long-term repercussions of climate policy uncertainty on corporate cash strategies and technological innovation’s role in mediating these strategies present fertile grounds for future inquiry.

In synthesis, the discourse illuminates a predominantly positive relationship between climate risk and corporate cash holdings, albeit with nuances dictated by sector-specific dynamics, financial constraints, and locational factors. The interplay between climate policy uncertainty and corporate financial practices highlights an imperative for firms to dynamically adjust their cash holding policies in light of anticipated or extant climate risks and policy shifts. As the phenomenon of climate change continues to forge significant macroeconomic and microeconomic challenges, the beckoning for comprehensive, sector-specific, and longitudinal studies is pronounced, aiming to unravel and adeptly navigate the financial intricacies posed by this global exigency.


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