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07-09-2024

Companies gain trust and lower costs through climate action

The escalating climate crisis, marked by frequent extreme weather events, highlights the significant role companies, especially high-emission industries, play in global carbon emissions. Many businesses are now proactively taking action against climate change by reducing their carbon footprint and transparently sharing their environmental strategies.

The Task Force on Climate-Related Financial Disclosures (TCFD) provides a framework for companies to disclose climate-related financial information, helping them navigate climate change risks and opportunities. 

Support for TCFD has grown, with Japan leading in such disclosures. However, the tangible benefits of TCFD disclosures on a company’s financial performance remain underexplored.

To address this, a research team from Kyushu University analyzed data from about 2,100 Japanese listed companies over five years (2017-2021). Published in Corporate Social Responsibility and Environmental Management, this study is one of the first to use comprehensive TCFD and corporate data in Japan.

Promoting a lower carbon economy 

“A segment of investors is strategically directing funds towards companies that develop green innovation and energy transformation with the aim of promoting a low-carbon economy,” wrote the researchers.

“Consequently, numerous companies must fundamentally overhaul their business models and strategies, transitioning towards practices that effectively reduce GHG emissions, including process improvements, emissions reduction planning, increased green investments, and the production of climate-friendly goods.”

Corporate climate action

The researchers examined the impact of corporate climate actions, including carbon performance, climate-related disclosures, and corporate commitments, on the cost of capital – the expenses a company incurs to finance operations. 

The findings indicate that higher carbon emissions result in higher borrowing and fundraising costs. However, companies adhering to TCFD guidelines and transparently sharing climate data benefit from lower capital costs. 

Simply pledging climate action does not significantly affect financial costs, as stakeholders prioritize actual deeds over promises.

Climate change risks create uncertainties 

Key findings reveal that high greenhouse gas (GHG) emissions increase climate change risks, such as extreme weather events and regulatory changes. 

These risks create uncertainties, leading investors and lenders to demand higher returns, thus raising the cost of equity (CoE) and debt (CoD). CoE is the return investors expect for buying company stock, while CoD is the fee a company pays to borrow money.

Transparency in climate data 

Transparency in climate data is crucial for reducing these uncertainties, allowing investors to make informed decisions. 

“When companies share climate-related data, it gives investors and consumers a clearer picture of their environmental efforts, making them more likely to invest,” said study co-author Siyu Shen, a graduate student at Kyushu University.

“We found that this kind of openness is particularly important in energy sectors like electricity and oil, where climate change is a major issue.”

Climate action can lower debt

While TCFD guidelines effectively reduced CoE, they did not significantly impact CoD, possibly due to Japan’s negative interest rate policy during the study period. This policy, which ended in March 2024, kept borrowing costs low. 

With rising interest rates in the Japanese bond market, sustainable linked loans for decarbonizing energy transitions at low rates are becoming popular. Moving forward, corporate climate actions in Japan may lower the cost of debt.

Climate disclosures and capital costs 

Although this study focuses on Japan, it offers insights for global investors, companies, and policymakers by highlighting the connection between climate disclosures and capital costs. 

Since 2022, companies listed in Japan’s prime markets must follow TCFD guidelines. As more companies engage in climate action, they should consider additional strategies to enhance their carbon performance.

Environmental economic studies, including this one, have led Kyushu University’s Professors Shunsuke Managi and Alexander Ryota Keeley to establish aiESG, a startup utilizing AI to analyze global supply chain sustainability. 

Supporting companies to take climate action

The research team plans to expand their analysis globally to understand how regional regulations and cultural differences impact the relationship between climate change, carbon performance, and capital costs.

“Given that investors are increasingly attentive to firms’ environmental activities, elucidating how investors respond to firms’ climate change mitigation actions is imperative,” noted the researchers.

Collaboration among investors, companies, academics, and policymakers is crucial for addressing the global climate crisis and achieving carbon neutrality. 

“We hope our research provides the scientific evidence needed to support companies in developing new strategies, changing behaviors, and ultimately reducing emissions,” concluded corresponding author Hidemichi Fujii, a professor at Kyushu University’s Faculty of Economics.

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