Abstract:

Objective: The study was conducted to evaluate the impact of climate change commitment (CCC) on the debt financing policies. It also evaluated the moderating role of institutional investors.

Methodology: The research adopted a quantitative approach using 150 firms of the S&P 500 based on market cap for 2010-2024 to capture the long-term impact. The data was analysed using Feasible GLS regression due to heteroscedasticity issues.

Findings: The findings highlighted that CCC significantly and positively impacted financing policies measured using debt to equity (β = 59.681, p = 0.000) and debt ratio (β = 14.287, p = 0.000). However, it did not have a significant impact on the interest coverage ratio (β = -0.983, p = 0.139). Furthermore, institutional investors negatively and significantly moderated the relationship of CCC with debt-to-equity ratio (B = -262.39, p = 0.000), debt ratio (B = -62.754, p = 0.000). However, it did not significantly moderate the relationship of CCC with interest coverage ratio (B = 1.09, p = 0.707).

Implications: As per agency theory, institutional investors can reinforce the credibility of climate-related commitments firms make when they commit to such objectives. These investors can further enhance these commitments through pressure for transparency, accountability, and long-term value creation. Regulatory authorities should promote or require climate-related disclosures, as CCC can impact financial decision-making, especially if backed by robust institutional controls.

Keywords: Climate change commitment, debt financing policy, institutional investors, S&P 500, debt ratio, financial decision-making.

1. INTRODUCTION

The global climate change challenge threatens the ecosystems and economies of the world; hence, there has been growing attention towards the sustainability policies of organisations. Many companies are experiencing increasing pressure from multiple stakeholders, such as institutional shareholders, government bodies, and consumers, to adopt proactive policies to deal with environmental issues (Bose et al., 2024; Flammer et al., 2021; Ooi et al., 2024). Climate change policies, disclosures, environmental technological advancements, and corporate social responsibility have become key components of firms’ sustainability strategies (Le, 2022). These pressures have greatly influenced corporate developments, especially in finance. Among these approaches, the role of Climate Change Commitment (CCC) in forming debt financing policies has been of keen interest among researchers. Businesses realise that it is not only an ethical responsibility but also a pertinent issue that represents the company’s solvency and possible risks to add environmental sustainability to their business practices (Lemma et al., 2021). In the case of S&P 500 companies, these pressures on sustainability are further accentuated, as big publicly traded businesses continue to come under more pressure and scrutiny from institutional investors and regulators (Yahaya, 2025). CCC is increasingly forming its financing plans, such as debt raising, in which stakeholders require transparency, risk reduction, and long-term value in line with environmental objectives (Hsueh, 2022).

Subsequently, institutional investors like pension funds, mutual funds, and hedge funds are assuming a progressively pivotal role in the governance of business conduct (Gu et al., 2023; Klettner, 2021; Yang et al., 2024). These investors apply criteria like ESG while considering companies, with the case that climate change is a threat and an opportunity that affects financial performance in the future. Institutional investors, as significant stakeholders in most organisations, can pressure companies to adopt sustainable goals by manoeuvring the companies’ business models and policies, such as debt management (Jabbour et al., 2020).

An important area of corporate financial management is debt financing, which concerns decisions as to how much debt to incur and on what terms. Socially aware and climate-concerned firms that want to improve CSR results may uphold more conservative debt levels because these organisations usually face risks related to climate responsibilities and large-scale sustainability projects (Ahmed et al., 2022; Cato, 2022). However, the study of (Shi et al., 2022) found that CCCs are likely to be partially mediated by debt financing policies owing to institutional investor pressure since these investors have leverage in the firm’s capital structure choice mechanisms. This is applicable as the present study investigates how debt financing by S&P 500 companies is influenced by climate change pledges, with institutional investors having the potential to moderate this relationship through their role in shaping capital structure choices.

In the context of the S&P 500, companies operate in a business environment where climate-related risks highly affect investors’ decisions, regulatory requirements and market expectations. These firms face increasing pressure from institutional investors, activist shareholders, and policymakers committing to ambitious climate change targets and demonstrating credible progress towards them (Hsueh, 2022). Simultaneously, they must make capital structure decisions in an environment of increased scrutiny, where excessive leverage can raise concerns about the company’s ability to finance large-scale sustainability projects and meet future climate-related obligations (Yang et al., 2024). It increases tension between maintaining financial flexibility and responding to stakeholder demands for meaningful climate action, particularly as lenders and credit rating agencies start factoring climate performance into debt risk assessments (Gu et al., 2023).

Furthermore, (UCLA, 2025) indicated that despite advances in climate disclosures, S&P 500 firms continue to grapple with challenges in proving a real commitment to climate change. There are gaps like incomplete cost estimates for transition plans, limited board-level monitoring, and low levels of environmental skills among directors. Scope 3 emissions, adaptation plans, and physical risk disclosures are underreported. Differences in data consistency, methodology, and limited reporting scopes impede comparability and accountability and strip stakeholder confidence. Without thorough financial planning, strong governance frameworks, and transparent, standardised reporting, companies risk failing regulatory expectations and investors’ demands. Improving these areas is critical to convert commitments into believable, actionable strategies that yield quantifiable decarbonisation and climate resilience. The study examined the impact of CCC on debt financing policies and the moderating role of institutional investors. The study considered a sample of 150 firms from the S&P 500 index over 15 years.

An increasing number of research studies have recently been related to CCC, such as (Albitar et al., 2023). The study of (Xhindole & Tarquinio, 2024; and Zhao et al., 2024) has taken this research further by providing evidence of CCC on debt financing of the firms. However, these studies have not considered other variables that might moderate this relationship. In line with the agency theory, institutional investors, as monitoring agents, can reduce agency conflicts between managers and shareholders. Their oversight can ensure that the CCC of managers is credible and aligned with long-term firm value, increasing lender confidence and impacting its debt financing (Ali et al., 2023). Therefore, institutional investors are an important moderating variable in this relationship. Despite this theoretical justification, empirical studies on this stance are limited.

Addressing the aforementioned gaps, the current study evaluates S&P 500 companies from 2010 to 2024, a context where investor scrutiny and climate accountability are high. The findings indicated that CCCS are significantly linked with conservative debt financing policies. However, the findings did not reveal the moderating role of institutional investors in the relationship between CCCS and debt financing policies.

The study contributes to the literature in three ways. It provides a theoretical contribution by challenging and extending the agency theory by emphasising the moderating role of institutional investors in the CCC-debt financing nexus. It adds to the empirical evidence on the moderating role of institutional investors. It offers insights for policymakers and investors on integrating climate considerations into corporate capital structure decisions and extends the application of agency theory to the context of climate-related financial decision-making in large publicly traded firms.

2. LITERATURE REVIEW

2.1. Climate Change Commitment (CCC)

CCC is an official promise of an organisation to reduce and respond to climate change by policies, plans, and measures to decrease greenhouse gas emissions, increase energy efficiency, adopt renewable energy opportunities, and incorporate environmental concern into the business operations (Kotz et al., 2024; Mohy-ud-Din et al., 2025; Zhou & Zhong, 2025). This dedication can be frequently fulfilled in terms of climate disclosure, investment in carbon neutrality, green technologies, and international frameworks such as the Paris Agreement or the Science-Based Targets (Bjorn et al., 2021; Mukhopadhyay & Sarkar, 2021).

CCC research has moved beyond concept definition to the modelling of its organisational impacts. To establish a relationship between corporate CCC and internal organisational competencies and external stakeholder relations, (Boiral et al., 2012) developed a conceptual framework and showed that the former may generate competitive advantage. Similarly, (Littlewood  et al., 2018) studied the high-emitting sectors in European countries and identified strategic, regulatory, and reputational drivers as the main causes of CCC, focusing on the companies that were more likely to react to a combination of market pressure, stakeholder activism, and competitive positioning. The article by (Jangid & Sharma, 2025) demonstrates empirical evidence in the Asia-Pacific area that good climate commitments are associated with better carbon performance due to regulatory alignment, technological innovation, and expectations of investors.

Nowadays, CCC gains more and more relevance when climate change begins to inflict serious harm to the global ecosystems, economies, and social structures. Not only are companies major carbon emitters, but they also face certain physical risks (such as extreme weather) and transitional risks (including regulatory changes) (Chen et al., 2022; Tavakolifar et al., 2021). CCC thus indicates a firm’s forward-looking approach in managing environmental footprint and long-term business risks. It is highly relevant for organisations today due to changing expectations of stakeholders, such as investors, customers, regulators, and employees, who increasingly expect accountability and sustainable practice (Birindelli et al., 2022). For investors, CCC is a critical marker of a company’s risk exposure, governance standards, and resilience. For companies, robust climate commitments can build reputation, appeal to ESG-oriented capital, and drive compliance with upcoming regulations, making CCC an integral part of contemporary corporate strategy and financial resilience (Ali et al., 2023).

From a corporate significance perspective, CCC performs various functions. As a signal for investors, it signifies a firm’s exposure to environmental risks, governance quality, and long-term value creation ability. For companies, firm climate commitments can consolidate stakeholder trust, secure capital from sustainability-oriented funds, and raise reputational standing in increasingly climate-responsible markets (Birindelli et al., 2022; Jangid & Sharma, 2025). Additionally, proactive CCC enhances lender attitudes towards risk, which is important when making policy decisions regarding debt finance. Thus, CCC is a green responsibility and a financial strategy in contemporary corporate decision-making.

2.2. Climate Change Commitment and Debt Financing Policies

Stakeholder theory holds that companies are responsible to various stakeholders, not only shareholders, who determine company decision-making. In taking aggressive climate commitments, companies act in response to stakeholders, such as creditors, who might view environmentally committed companies as less risky borrowers, since such commitments signal regulatory compliance, long-term resilience, and reputational strength, thereby potentially improving debt access and reducing borrowing costs (Dzomonda, 2022). As per this theory, CCC influence debt financing policies by developing creditor trust through increased transparency, reduced environmental risk exposure and alignment with long-term value creation. It reduces the perceived default risk, encourages favourable lending terms, and enables firms to access capital at reduced costs while maintaining sustainable capital structures (Jangid & Sharma, 2025). Signalling theory also predicts that CCC is a good signal to the market that reflects good risk management, long-term focus, and operating transparency. These signals can make a firm more reputable, credit-worthy, and likely to secure better debt terms (Gahramanova & Kutlu Furtuna, 2023). Under signalling theory, CCC communicate plausible information regarding a firm’s high-risk management, sustainability orientation, and governance excellence. Such signals lower information asymmetry between the firm and lenders, promoting perceived creditworthiness, improving access to debt markets on better terms and at reduced borrowing costs (Birindelli    et al., 2022). Trade-off theory, however, predicts that greater environmental commitments will raise operating expenses or create project risks, encouraging more conservative debt policies to preserve financial flexibility (Dang et al., 2023). CCC can decrease the risk of financial distress in the trade-off theory by increasing its costs through higher investments in sustainability and project risks that are not explicitly defined. To offset the tax benefit of debt against the increment of risks, more conservative leverage would allow companies to remain financially flexible to address uncertainty related to environmental projects and long-term commitments (Jangid & Sharma, 2025). In this way, CCC may empower or restrain the debt financing, depending on the way the markets interpret the costs, benefits, and reliability of the promises of the firm.

(Lemma et al., 2021) examined the effect of CCC and climate risk on debt financing policies on S&P 500 firms in 2015-2019. The results of this study revealed that the companies that have greater commitment to climate change activities have a higher debt proportion with extended maturity term. However, climate risk did not significantly impact debt financing policies. Although the study has specific merits, it is limited in its context of considering only data till 2019 and not considering any moderating role. Furthermore, the study of (Palea & Drogo, 2020) evaluated the relationship between carbon emissions and cost of debt financing for the sample of firms from the Eurozone from 2010 to 2018. There is a positive relationship between carbon emissions and the cost of debt financing. Research conducted by (Zhao et al., 2024) analysed the relationship between climate change and firm debt financing costs using non-financial listed firms in China from 1990 to 2017. The study found the negative impact of climate change on debt financing.

Furthermore, the study of (Qiu et al., 2025) also evaluated the role of climate change on debt financing using data from A-Share listed companies on the Shanghai and Shenzhen stock exchanges from 2007 to 2021. Climate risk, it has been discovered, is a strong suppressive factor of corporate debt financing which operates both in the long-term and short-term debt financing. Moreover, (Trinh et al., 2024) examined the correlation between climate change exposure and the cost of debt in a sample of 21 European countries during the period of 2001-2020. The researchers established a positive effect of climate change exposure on cost of debt where the higher the exposure the higher the cost of debt. CCC in the stakeholder theory is an indicator of attentiveness to the interests of creditors, investors, regulators, and the society, and therefore a rise in trust and legitimacy (Pankratz, 2023). Such trust reduces the perceived risk of lenders so that they may lend more and offer better terms. Signalling theory also supports this relation by stating that CCC conveys credible information about good governance, risk management and long-term strategic orientation (Gahramanova & Kutlu Furtuna, 2023). Such good signals reduce the information asymmetry between the firm and lenders, which increases access to the debt market. Therefore, it is hypothesised that;

H1: Climate change commitment significantly and positively impacts debt financing policies.

2.3. Moderating Role of Institutional Investor

Relying on agency theory, institutional investors serve as monitoring agents that align managerial actions with shareholder interests and curb agency conflicts (Zhao et al., 2021). When firms commit to climate-related objectives, institutional investors can reinforce the credibility of these commitments. By pressing for transparency, accountability, and long-term value creation, these investors can further enhance these commitments (Paseda & Okanya, 2020).

From an agency theory point of view, institutional investors moderate the CCC–debt relationship by alleviating agency tension and reconciling managerial behaviour with shareholder and creditor interests. Their monitoring, transparency requirements, and insistence on ESG compliance minimise information asymmetry, improving the credibility of climate commitments. This credibility reduces lenders’ perception of environmental initiatives as financial risks rather than value-enhancing strategies (Zhao et al., 2021). Therefore, creditors are more likely to provide conducive debt terms since institutional supervision guarantees sound governance and prudent risk management. Institutional investors, therefore, play the role of credibility enhancers, with CCC assuring that it facilitates sustainability goals and optimal debt financing policies.

Within debt financing, the participation of institutional investors can reassure creditors that the firm is environmentally and financially responsible. By insisting on strong environmental, social, and governance (ESG) practices and actively monitoring firms, institutional investors can assure creditors that a company’s climate pledges are genuine and supported by effective governance and risk management systems (Kordsachia et al., 2022). This, in effect, could lower perceived credit risk and facilitate better access to debt capital or even more effective loan conditions.

On the other hand, without robust institutional monitoring, lenders might doubt the genuineness or efficacy of a company’s CCC programs and consider them expense burdens that enhance financial risk (Ferreras et al., 2024; Lee & Choi, 2021). Institutional investors are therefore a trust-building device, which sustains the beneficial influence of CCC on debt financing policies and enables companies to attain both sustainability and financial goals (Chen et al., 2025; Xu et al., 2025). Hence, it is hypothesised that;

H2: Institutional Investors significantly moderate the relationship between climate change commitment and debt financing policies.

2.4. Conceptual Framework

Fig. (1) represents the conceptual framework of the study. The conceptual model examines the interaction between CCC as the independent variable and debt financing policies as the dependent variable, with institutional investor influence as a moderating variable. The model argues that companies with high CCC would realign their debt policies in response to perceived ecological risk or rising sustainability investment requirements (Lemma et al., 2021). Institutional investors can reinforce or weaken this link by affecting managerial choices, improving transparency, and boosting lender confidence (Zhao et al., 2021). Institutional investors function as active monitors and ensure that CCC efforts are credible and strategically aligned, potentially improving firms’ access to and terms of debt financing.

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