The effects of corporate carbon performance on financing cost-evidence from S&P 500

Shiyi Feng, Thitinant Wareewanich

Article ID: 7997
Vol 8, Issue 10, 2024

VIEWS - 0 (Abstract) 0 (PDF)

Abstract


This study investigates the impact of corporate carbon performance on financing costs, focusing on S&P 500 companies from 2015 to 2022. Utilizing a fixed-effects regression model, the research reveals a complex U-shaped nonlinear relationship between carbon intensity (CI) and cost of debt (COD). The sample comprises 2896 firm-year observations, with CI measured by the ratio of Scope 1 and 2 greenhouse gas (GHG) emissions to annual sales. The findings indicate that companies with higher CI initially face increased COD due to heightened regulatory and operational risks. However, as CI falls below a certain threshold, further reductions in emissions can paradoxically lead to increased COD, likely due to the substantial investments required for advanced technologies. Additionally, a positive relationship between CI and cost of equity (COE) is observed, suggesting that shareholders demand higher returns from companies with greater environmental risks. These results underscore the importance of balancing short-term and long-term environmental strategies. The study highlights the need for corporate managers to communicate the long-term benefits of environmental efforts effectively to creditors and investors. Policymakers should consider these dynamics when designing regulations that incentivize lower carbon emissions.


Keywords


carbon intensity; cost of debts; cost of equity; environmental sustainability; creditors; shareholders

Full Text:

PDF


References


Aggarwal, R., Erel, I., Ferreira, M., et al. (2011). Does governance travel around the world? Evidence from institutional investors. Journal of Financial Economics, 100(1), 154–181. https://doi.org/10.1016/j.jfineco.2010.10.018

Batoon, A. J., & Rroji, E. (2024). Analyzing the Impact of Carbon Risk on Firms’ Creditworthiness in the Context of Rising Interest Rates. Risks, 12(1), 16. https://doi.org/10.3390/risks12010016

Bauer, R., & Hann, D. (2010). Corporate Environmental Management and Credit Risk. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1660470

Bolton, P., & Kacperczyk, M. (2021). Do investors care about carbon risk? Journal of Financial Economics, 142(2), 517-549.

Broadstock, D. C., Matousek, R., Meyer, M., et al. (2020). Does corporate social responsibility impact firms’ innovation capacity? The indirect link between environmental & social governance implementation and innovation performance. Journal of Business Research, 119, 99–110. https://doi.org/10.1016/j.jbusres.2019.07.014

Bui, B., Moses, O., & Houqe, M. N. (2019). Carbon disclosure, emission intensity and cost of equity capital: multi‐country evidence. Accounting & Finance, 60(1), 47–71. https://doi.org/10.1111/acfi.12492

Busch, T., & Hoffmann, V. (2007). Emerging carbon constraints for corporate risk management. Ecological Economics, 62(3–4), 518–528. https://doi.org/10.1016/j.ecolecon.2006.05.019

Capasso, G., Gianfrate, G., & Spinelli, M. (2020). Climate change and credit risk. Journal of Cleaner Production, 266, 121634. https://doi.org/10.1016/j.jclepro.2020.121634

Caragnano, A., Tunyi, A. A., Nicolò, G., & Airoldi, G. (2020). Carbon risk, low-carbon policy, and lending decisions: The role of organizational structure and information processing. Journal of Business Ethics, 162(4), 711-731. https://doi.org/10.1007/s10551-018-3991-4

CEIC Data. (2024). US Market Capitalization, 1975–2024. Available online: https://www.ceicdata.com (accessed on 3 May 2024).

Chava, S. (2014). Environmental Externalities and Cost of Capital. Management Science, 60(9), 2223–2247. https://doi.org/10.1287/mnsc.2013.1863

Chen, X., Li, X., & Huang, X. (2020). The impact of corporate characteristics and external pressure on environmental information disclosure: a model using environmental management as a mediator. Environmental Science and Pollution Research, 29(9), 12797–12809. https://doi.org/10.1007/s11356-020-11410-x

Choi, G. (2022). Determinants of target location selection for acquirers in the manufacturing sector: Pollution intensity, policy enforcement, and civic environmentalism. Journal of Business Research, 146, 308–324. https://doi.org/10.1016/j.jbusres.2022.04.026

Clarkson, P. M., Fang, X., Li, Y., et al. (2013). The relevance of environmental disclosures: Are such disclosures incrementally informative? Journal of Accounting and Public Policy, 32(5), 410–431. https://doi.org/10.1016/j.jaccpubpol.2013.06.008

Clarkson, P. M., Li, Y., Pinnuck, M., et al. (2014). The Valuation Relevance of Greenhouse Gas Emissions under the European Union Carbon Emissions Trading Scheme. European Accounting Review, 24(3), 551–580. https://doi.org/10.1080/09638180.2014.927782

Climate Bonds Initiative. (2023). State of the Market Q3 2023. Climate Bonds Initiative. Available online: https://www.climatebonds.net/resources/reports/state-market-q3-2023 (accessed on 3 May 2024).

Datt, R. R., Luo, L., & Tang, Q. (2019). Corporate voluntary carbon disclosure strategy and carbon performance in the USA. Accounting Research Journal, 32(3), 417–435. https://doi.org/10.1108/arj-02-2017-0031

Davis, G. F., & Cobb, J. A. (2010). Resources, organizations, and sustainability: An institutional perspective. Business and Society, 49(1), 88-111.

Dhaliwal, D. S., Li, O. Z., Tsang, A., et al. (2011). Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting. The Accounting Review, 86(1), 59–100. https://doi.org/10.2308/accr.00000005

Dyck, A., Lins, K. V., Roth, L., et al. (2019). Do institutional investors drive corporate social responsibility? International evidence. Journal of Financial Economics, 131(3), 693–714. https://doi.org/10.1016/j.jfineco.2018.08.013

El Ghoul, S., Guedhami, O., Kim, H., & Park, K. (2018). Corporate environmental responsibility and the cost of capital: International evidence. Journal of Business Ethics, 149(2), 335-361. https://doi.org/10.1007/s10551-015-3000-4

Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the cost of debt: Evidence from EU countries. Critical Perspectives on Accounting, 79, 102097. https://doi.org/10.1016/j.cpa.2019.102097

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Gerged, A. M., Matthews, L., & Elheddad, M. (2020). Mandatory disclosure, greenhouse gas emissions and the cost of equity capital: UK evidence of a U‐shaped relationship. Business Strategy and the Environment, 30(2), 908–930. https://doi.org/10.1002/bse.2661

Gielen, D., Boshell, F., Saygin, D., et al. (2019). The role of renewable energy in the global energy transformation. Energy Strategy Reviews, 24, 38–50. https://doi.org/10.1016/j.esr.2019.01.006

Giese, G., Lee, L. E., Melas, D., et al. (2019). Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk, and Performance. The Journal of Portfolio Management, 45(5), 69–83. https://doi.org/10.3905/jpm.2019.45.5.069

Gonzalez-Gonzalez, J. M., & Ramírez, C. Z. (2016). Voluntary carbon disclosure by Spanish companies: An empirical analysis. International Journal of Climate Change Strategies and Management, 8(1), 57–79. https://doi.org/10.1108/IJCCSM-07-2014-0084

Griffin, P. A., Lont, D. H., & Sun, E. Y. (2017). The Relevance to Investors of Greenhouse Gas Emission Disclosures. Contemporary Accounting Research, 34(2), 1265–1297. https://doi.org/10.1111/1911-3846.12298

Guastella, G., Pareglio, S., & Schiavoni, C. (2023). An Empirical Approach to Integrating Climate Reputational Risk in Long-Term Scenario Analysis. Sustainability, 15(7), 5886. https://doi.org/10.3390/su15075886

Guenther, E., Guenther, T., Schiemann, F., et al. (2016). Stakeholder Relevance for Reporting. Business & Society, 55(3), 361–397. https://doi.org/10.1177/0007650315575119

Hart, S. L. (1995). A Natural-Resource-Based View of the Firm. The Academy of Management Review, 20(4), 986. https://doi.org/10.2307/258963

He, P., Shen, H., Zhang, Y., et al. (2019). External Pressure, Corporate Governance, and Voluntary Carbon Disclosure: Evidence from China. Sustainability, 11(10), 2901. https://doi.org/10.3390/su11102901

He, Y., Tang, Q., & Wang, K. (2013). Carbon disclosure, carbon performance, and cost of capital. China Journal of Accounting Studies, 1(3–4), 190–220. https://doi.org/10.1080/21697221.2014.855976

Hoffmann, V. H., & Busch, T. (2008). Corporate Carbon Performance Indicators. Journal of Industrial Ecology, 12(4), 505–520. https://doi.org/10.1111/j.1530-9290.2008.00066.x

Intergovernmental Panel on Climate Change. (2021). Climate change 2021: The physical science basis. Available online: https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM_final.pdf (accessed on 3 May 2024).

International Energy Agency. (2024). World Energy Investment 2024. International Energy Agency. Available online: https://www.iea.org/reports/world-energy-investment-2024 (accessed on 3 May 2024).

Jung, J., Herbohn, K., & Clarkson, P. (2016). Carbon Risk, Carbon Risk Awareness and the Cost of Debt Financing. Journal of Business Ethics, 150(4), 1151–1171. https://doi.org/10.1007/s10551-016-3207-6

Kabir, H., Ashraf, M. A., & Hassan, M. K. (2021). Carbon risk and cost of capital: Evidence from carbon emissions trading scheme in China. Journal of Business Ethics. https://doi.org/10.1007/s10551-021-04902-1

Kim, Y. B., An, H. T., & Kim, J. D. (2015). The effect of carbon risk on the cost of equity capital. Journal of Cleaner Production, 93, 279–287. https://doi.org/10.1016/j.jclepro.2015.01.006

Krishnamurti, C., & Velayutham, E. (2018). The influence of board committee structures on voluntary disclosure of greenhouse gas emissions: Australian evidence. Pacific-Basin Finance Journal, 50, 65–81. https://doi.org/10.1016/j.pacfin.2017.09.003

Kumar, P., & Firoz, M. (2018). Impact of carbon emissions on cost of debt-evidence from India. Managerial Finance, 44(12), 1401–1417. https://doi.org/10.1108/mf-03-2018-0108

Lemma, T. T., Feedman, M., Mlilo, M., et al. (2018). Corporate carbon risk, voluntary disclosure, and cost of capital: South African evidence. Business Strategy and the Environment, 28(1), 111–126. https://doi.org/10.1002/bse.2242

Li, H., Fu, S., Chen, Z., et al. (2019). The motivations of Chinese firms in response to the Carbon Disclosure Project. Environmental Science and Pollution Research, 26(27), 27792–27807. https://doi.org/10.1007/s11356-019-05975-5

Li, L., Liu, Q., Wang, J., et al. (2019). Carbon Information Disclosure, Marketization, and Cost of Equity Financing. International Journal of Environmental Research and Public Health, 16(1), 150. https://doi.org/10.3390/ijerph16010150

Lins, K. V., Servaes, H., & Tamayo, A. (2017). Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis. The Journal of Finance, 72(4), 1785–1824. https://doi.org/10.1111/jofi.12505

Long, R., Wang, X., Wu, M., et al. (2023). The impact of carbon information disclosure on the cost of capital: The moderating role of regulatory pressures. Resources, Conservation and Recycling, 193, 106970. https://doi.org/10.1016/j.resconrec.2023.106970

Luo, L. (2017). The influence of institutional contexts on the relationship between voluntary carbon disclosure and carbon emission performance. Accounting & Finance, 59(2), 1235–1264. https://doi.org/10.1111/acfi.12267

Lyon, T. P., & Montgomery, A. W. (2015). The Means and End of Greenwash. Organization & Environment, 28(2), 223–249. https://doi.org/10.1177/1086026615575332

Maaloul, A. (2018). The effect of greenhouse gas emissions on cost of debt: Evidence from Canadian firms. Corporate Social Responsibility and Environmental Management, 25(6), 1407–1415. https://doi.org/10.1002/csr.1662

Misani, N., & Pogutz, S. (2015). Unraveling the effects of environmental outcomes and processes on financial performance: A non-linear approach. Ecological Economics, 109, 150–160. https://doi.org/10.1016/j.ecolecon.2014.11.010

Ng, A. C., & Rezaee, Z. (2015). Business sustainability performance and cost of equity capital. Journal of Corporate Finance, 34, 128–149. https://doi.org/10.1016/j.jcorpfin.2015.08.003

Nollet, J., Filis, G., & Mitrokostas, E. (2016). Corporate social responsibility and financial performance: A non-linear and disaggregated approach. Economic Modelling, 52, 400–407. https://doi.org/10.1016/j.econmod.2015.09.019

Palea, V., & Drogo, F. (2020). Carbon emissions and the cost of debt in the eurozone: The role of public policies, climate‐related disclosure and corporate governance. Business Strategy and the Environment, 29(8), 2953–2972. https://doi.org/10.1002/bse.2550

Siddique, M. A., Akhtaruzzaman, M., Rashid, A., et al. (2021). Carbon disclosure, carbon performance and financial performance: International evidence. International Review of Financial Analysis, 75, 101734. https://doi.org/10.1016/j.irfa.2021.101734

Sullivan, R., & Gouldson, A. (2016). The Governance of Corporate Responses to Climate Change: An International Comparison. Business Strategy and the Environment, 26(4), 413–425. https://doi.org/10.1002/bse.1925

Sun, M., Wang, Q., & Zhang, H. (2018). General Bayesian networks analysis of the correlation between corporate environmental management activities and financial performance. Frontiers in Environmental Science, 6, 53-64. https://doi.org/10.3389/fenvs.2018.00053

Trinks, A., Ibikunle, G., Mulder, M., et al. (2022). Carbon Intensity and the Cost of Equity Capital. The Energy Journal, 43(2), 181–214. https://doi.org/10.5547/01956574.43.2.atri

Velte, P., Stawinoga, M., & Lueg, R. (2020). Carbon performance and disclosure: A systematic review of governance-related determinants and financial consequences. Journal of Cleaner Production, 254, 120063. https://doi.org/10.1016/j.jclepro.2020.120063

Wang, G., Lou, X., Shen, J., et al. (2022). Corporate Carbon Information Disclosure and Financing Costs: The Moderating Effect of Sustainable Development. Sustainability, 14(15), 9159. https://doi.org/10.3390/su14159159

Wang, J., & Deng, J. (2021). Research on the Effect of Executive Incentive Institutional Innovation on the Cost of Equity—Evidence from Chinese Listed Companies. Frontiers in Psychology, 12. https://doi.org/10.3389/fpsyg.2021.686955

Zhao, Y., Zhu, S., & Zhang, G. (2022). Local and spatial spillover effects of corporate financing costs on regional carbon emissions: evidence from Chinese listed firms. Environmental Science and Pollution Research, 30(9), 24242–24255. https://doi.org/10.1007/s11356-022-23896-8

Zhou, Z., Zhang, T., Wen, K., et al. (2018). Carbon risk, cost of debt financing and the moderation effect of media attention: Evidence from Chinese companies operating in high‐carbon industries. Business Strategy and the Environment, 27(8), 1131–1144. https://doi.org/10.1002/bse.2056




DOI: https://doi.org/10.24294/jipd.v8i10.7997

Refbacks

  • There are currently no refbacks.


Copyright (c) 2024 Shiyi Feng, Thitinant Wareewanich

License URL: https://creativecommons.org/licenses/by/4.0/

This site is licensed under a Creative Commons Attribution 4.0 International License.