In the same boat: Climate risk and hidden debt in the supply chain

Abstract

This study explores how companies adjust trade credit in response to climate change risks within supply chains. Covering 20,946 company-supplier-year pair observations from 2003 to 2022 in China, we find that: (1) As climate-related physical risks from suppliers increase, customer companies reduce accounts payable to mitigate financial vulnerabilities and enhance supply chain resilience. A one-unit increase in climate risk can cause a 0.01% decline in the short-term accounts payable and a 0.03% decrease in the long-term. (2) Companies tend to terminate supplier-customer relationships if these climate uncertainties persist beyond two years. While companies invest in innovation and reallocate resources for climate adaptation, unexpected shocks continue to affect their financial decisions, particularly when risk exposure exceeds experience-based expectations. (3) Proximity in geography, administration, and economy improves supply chain collaboration, leading to earlier supplier payments. In contrast, customer companies increase accounts payable if suppliers are located in regions with less adaptation ability.