Carbon disclosure, carbon performance and financial performance: international evidence

Carbon disclosure, carbon performance and financial performance: international evidence

This study examines the relationships and interrelationships between carbon disclosure and carbon performance, and between carbon performance and financial performance. It also examines the relationship between carbon disclosure and financial performance. Additionally, it investigates the relationship between agency cost and carbon disclosure, and between agency cost and carbon performance. Finally, this research investigates the trends in improvement of carbon disclosure and carbon performance of the companies, over the study period. The interrelationships between carbon disclosure and carbon performance, and between carbon performance and financial performance, have not been investigated by any study before. Similarly, no study has yet investigated the relationship between carbon disclosure and financial performance. The relationships between carbon disclosure/carbon performance and agency cost, have not been studied either by any previous research. Whilst a couple of studies have conducted trend analysis of carbon disclosure previously, no study has yet undertaken trend analysis of carbon performance. These examinations are performed by using a cross-sectional sample of the world’s largest 500 firms, drawn from most major industry sectors, who participated in the Carbon Disclosure Project (CDP) questionnaire survey over the five-year period from 2011 to 2015. Both full sample and country-wise analysis have been done, to test the hypotheses of this study.

Carbon disclosure and carbon performance scores for the sample companies are taken from the CDP database. Data for financial performance indicators, agency costs and relevant control variables, are collected from Thomson Reuters Datastream database.

Findings of this study indicate that there is a significant positive relationship between a firm’s carbon disclosure, and its carbon performance. They also indicate that carbon disclosure and carbon performance of business, influence each other positively. Country-wise analysis shows that carbon disclosure is significantly positively related to carbon performance in all of the four regions of this study - namely North America, EU, UK and Asia-Pacific. Both way positive interrelationship between carbon disclosure and carbon performance, holds true in all regions except the UK.

The study also finds that carbon performance of a business is significantly negatively related to both accounting-based measure as well as market-based measure of a firm’s financial performance. It also finds that there is no significant interrelationship between carbon performance and accounting-based measure of a firm’s financial performance. However, carbon performance and market-based measure of a firm’s financial performance, influence each other negatively - this relationship might vary across industries. Carbon performance is negatively related to both accounting-based measure as well as market-based measure of a firm’s financial performance, in all regions except the UK. There is no significant and consistent interrelationship between carbon performance and any of the measures of firm financial performance, in any region.

Results of this study indicate that there is a significant negative relationship between carbon disclosure and accounting-based measure of a firm’s financial performance. However, there is no significant and consistent relationship between carbon disclosure and a firm’s market-based financial performance. There is a significant negative relationship between carbon disclosure and accounting-based measure of a firm’s financial performance, in all regions. However, there is no significant relationship between carbon disclosure and market-based measure of a firm’s financial performance in any region.

This study also finds out that there is a positive but insignificant relationship between carbon disclosure and agency cost, both when agency cost is measured by Expense Ratio or by Asset Utilization Ratio. Results also indicate that carbon performance does not significantly affect a firm’s agency cost when agency cost is measured by Expense Ratio. However, when agency cost is measured by Asset Utilization Ratio, there is a significant negative relationship between carbon performance and agency cost. Carbon disclosure and carbon performance both significantly positively affect agency cost in North America, however there is no significant and consistent relationship between agency cost and both carbon disclosure and carbon performance, in any other region.

Results of this study show that the level of carbon disclosure for the sample companies, have significantly and consistently improved during the study period. On the other hand, carbon performance did not significantly improve towards the beginning of the study period. It started improving later, but these improvements were not always consistent. Country-wise analysis shows similar patterns in all regions.

This study contributes to the literature that deals with the relationships and interrelationships between carbon disclosure, carbon performance and financial performance, by producing a number of novel findings that suggest there is a positive interrelationship between carbon disclosure and carbon performance; carbon performance and market-based measure of financial performance influence each other negatively; carbon disclosure and accounting-based measure of financial performance are negatively related and carbon performance negatively affects agency cost.