The escalating frequency of extreme weather events in recent years serves as a stark reminder of the pressing need for immediate action on climate change. Industries with high emissions play a significant role in global carbon output, making their participation crucial in the battle against climate change. Acknowledging their responsibility, many businesses are now actively reducing their carbon footprint and disclosing their environmental strategies and data.
The Task Force on Climate-Related Financial Disclosures (TCFD) offers a promising framework for companies to disclose climate-related financial information, thereby helping them navigate climate risks and seize opportunities. Japan has emerged as a leader in adopting TCFD guidelines, and while the specific economic benefits of these disclosures are yet to be fully understood, the potential is significant.
To address this gap, researchers at Kyushu University analysed data from approximately 2,100 Japanese listed companies over five years (2017-2021). Their study, published in Corporate Social Responsibility and Environmental Management on May 20, 2024, focused on how corporate climate actions and disclosures impact the cost of capital, which is crucial for financing operations.
The study found that companies with higher carbon emissions face higher borrowing costs, reflecting increased climate risks such as extreme weather and regulatory changes. However, companies adhering to TCFD guidelines and disclosing climate-related data experienced lower capital costs. Significantly, promises of climate action without transparent disclosures did not influence financial costs, underscoring stakeholders’ preference for substantive action over rhetoric.
A key finding underscored the role of greenhouse gas emissions in exacerbating climate risks, both physical (e.g., extreme weather events) and transition-related (e.g., regulatory shifts). These uncertainties prompt investors and lenders to demand higher returns, thereby increasing costs of equity and debt. The study highlights that transparency in climate-related data is not just important, but necessary, enabling stakeholders to make informed decisions.
The study’s second author, Siyu Shen, emphasised the importance of climate-related data transparency in influencing investor and consumer decisions, particularly in energy-intensive sectors like electricity and oil. While TCFD adherence reduced the cost of equity, it had less impact on the price of debt during Japan’s period of negative interest rates, which ended in March 2024. With interest rates expected to rise, sustainable linked loans aimed at decarbonisation are gaining traction, potentially lowering debt costs for companies committed to climate action.
Though focused on Japan, the study offers global insights into the relationship between climate disclosures and capital costs. Since 2022, Japan’s prime market-listed companies have been required to follow TCFD guidelines, signalling a broader trend towards climate accountability. This research has inspired Professor Shunsuke Managi and Associate Professor Alexander Ryota Keeley to establish aiESG, a start-up using AI to assess global supply chain sustainability. Their plans include expanding global analyses to understand the regional impacts of climate regulations and cultural factors on capital costs and carbon performance.
Collaboration among investors, companies, academics, and policymakers is essential for addressing the climate crisis and achieving carbon neutrality. The study aims to provide evidence supporting companies in adopting effective strategies, changing behaviours, and reducing emissions.
More information: Yizhou Wang et al, How corporate climate change mitigation actions affect the cost of capital, Corporate Social Responsibility and Environmental Management. DOI: 10.1002/csr.2853
Journal information: Corporate Social Responsibility and Environmental Management Provided by Kyushu University