Introduction

Climate change represents a critical global challenge, with trillions of dollars required annually to meet the goals of the Paris Agreement. Current annual climate finance is approximately 1.3 trillion dollars, yet this remains significantly below the estimated 8.1 to 9 trillion dollars needed annually through 2030. High-profile examples, such as Nippon Steel, indicate that even large companies face financing challenges; the firm plans to invest at least 400 billion yen in R&D and 4-5 trillion yen in capital expenditure to replace existing assets for decarbonisation.

This paper investigates how corporate industrial diversification and internal capital markets facilitate these substantial investments by mitigating financing constraints. It specifically focuses on the role of cash flow coinsurance in enhancing a firm’s capacity for external financing and resource reallocation.

Literature and hypotheses

Decarbonisation investments are characterised by three primary factors: the requirement for immense capital, long-term horizons where green innovation may take years to contribute to profits, and high uncertainty. Research suggests that green R&D often involves higher risk than standard capital expenditures. The study develops two main hypotheses: industrial diversification decreases carbon intensity by alleviating financing constraints (H1), and cash flow coinsurance mitigates carbon intensity by enhancing internal capital market efficiency (H2).

Methodology and data

The empirical analysis utilises a sample of non-financial firms listed on the Tokyo Stock Exchange between 2006 and 2019. Data sources include the Toyo-Keizai CSR database and the Carbon Disclosure Project (CDP). The primary dependent variable is carbon intensity, defined as the ratio of Scope 1 and Scope 2 greenhouse gas emissions to total revenue. Diversification is measured via a binary dummy variable and a coinsurance measure (cfcoins) reflecting inter-segment risk reduction calculated using the standard deviation and correlation of segmental cash flows.

Empirical results

The research finds that diversification reduces carbon intensity. Specifically, among diversified firms, low cash flow correlation between business segments (high coinsurance) significantly decreases carbon intensity. These results are robust when addressing endogeneity and self-selection concerns. The evidence suggests that the stabilising effect of coinsurance on overall cash flows enhances a firm’s capacity to issue green bonds and utilize internal capital markets to fund projects in cash-constrained segments.

The impact of cash flow coinsurance is particularly evident in carbon-intensive industries and during the period following the Paris Agreement. Furthermore, the study finds that coinsurance significantly affects Scope 1 emissions—which require large-scale asset replacement—but does not significantly impact Scope 2 emissions, which are more easily reduced through renewable energy adoption. Crucially, the effect is only observed in firms with an environmental or CSR committee, suggesting that firms deliberately use financial slack to meet decarbonisation targets.

Conclusion

The paper concludes that corporate diversification facilitates improved carbon performance by easing the financial constraints associated with large-scale decarbonisation projects. The findings highlight the importance of internal capital markets and debt capacity in achieving environmental goals. Future research is suggested to examine the specific pathways through which coinsurance influences green bond issuance and its impact on Scope 3 emissions across the supply chain.