Corporate Diversification and Corporate Carbon Performance

Achieving the Paris Agreement's goals requires substantial decarbonization investments by companies. This paper investigates the impact of corporate industrial diversification on environmental performance by focusing on the role of cash flow coinsurance. Corporate diversification may ease financing constraints and promote decarbonization investments by facilitating external financing and reallocating resources through internal capital markets across segments. Using a sample of Japanese firms from 2006 to 2019, we find that corporate diversification mitigates carbon intensity, especially among diversified firms with low cash flow correlation among business segments (high coinsurance). The relationship between coinsurance and carbon intensity is particularly evident among firms operating in carbon-intensive industries and during the period following the Paris Agreement. We also find that cash flow coinsurance does not significantly impact Scope 2 emissions but that it has a significant impact on Scope 1 emissions, for which large investments are required. Our results suggest that industrial diversification lowers carbon intensity by mitigating the financing constraints associated with decarbonization projects.