Essays on carbon disclosure and financial consequences

Abstract

In boardrooms around the world, climate change has recently emerged as a major issue, matching the level of public concern. This thesis is motivated by the growing interest in assessing the financial consequences of corporate involvement in climate change beyond regulatory compliance, as evidenced by firms’ voluntary participation in the Carbon Disclosure Project (CDP). This thesis contributes to the ongoing literature by extending insights into three financial consequences of voluntary carbon disclosure, namely, financial performance, firm risk, and market reaction. We empirically investigate these financial consequences by conducting three essays using a unique dataset containing firms listed on the London Stock Exchange’s FTSE350 index for the period 2007 to 2015. In the first essay, we empirically conceptualise and investigate the impact of adopting proactive carbon strategies on financial performance, building on the resource-based view (RBV) of the firm as a theoretical framework. For this, we employ a panel data approach. The finding provides strong evidence that voluntary carbon disclosure and firm financial performance are positively associated. In the second essay, we build on the RBV theory and consider the potentially positive association between information asymmetry and firm risk, and subsequently the relationship between corporate carbon disclosure and firm risk, by appointing the panel data approach. We find that the adoption of carbon strategies significantly reduces the firm’s total, systematic, and idiosyncratic risks. In the third essay, we examine the market reaction to carbon disclosure announcements by adopting an event study method. This is done by considering investors’ perspective on the costs and benefits of carbon disclosure. The results show that the market reacts significantly negatively to carbon disclosure announcements via the CDP. Furthermore, additional tests are applied, including investigating the influence of the global financial crisis and industry status on the examined relationships. Our research findings offer fresh insights and updated policy implications for investors, management, regulators, and sustainability institutions.