A recent study from Kyushu University examined how corporate climate change actions affect the cost of capital for 2,100 Japanese listed companies from 2017 to 2021. The study found that companies with lower carbon intensity and more climate-related disclosures can reduce their capital costs, while mere commitments to climate change without concrete actions do not significantly impact these costs.
As extreme weather events become more frequent, companies, especially those in high-emission industries, are critical in the fight against climate change. Many businesses are now actively working to reduce their carbon footprint and share their environmental strategies and data transparently.
Sharing information
The Task Force on Climate-Related Financial Disclosures (TCFD) provides a framework for companies to share climate-related financial information. Support for TCFD has grown, with Japan being a leading advocate. However, the financial benefits of TCFD disclosures have been less explored.
To fill this gap, the researchers analyzed data from about 2,100 Japanese listed companies over five years. They looked at the impact of corporate climate change actions, including carbon performance, climate-related disclosures, and commitments, on the cost of capital. The study found that companies with higher carbon emissions face higher borrowing and financing costs. However, those that follow TCFD guidelines and transparently share climate-related information benefit from lower capital costs. Simply making promises about climate action does not significantly impact financial costs, as stakeholders prioritize actions over words.
A key finding is that high greenhouse gas (GHG) emissions increase climate change risks, such as extreme weather events and regulatory changes. These risks create uncertainties, prompting investors and lenders to demand higher returns, resulting in higher costs of equity (CoE) and debt (CoD). CoE is the return investors expect for buying a company’s stock, while CoD is the cost a company pays to borrow money.
Transparency is key
Transparency in climate change-related data helps reduce these uncertainties. “When companies share climate-related data, it gives investors and consumers a clearer picture of their environmental efforts, making them more likely to invest,” the authors explain. This openness is especially important in sectors like energy, where climate change is a major issue.
Interestingly, while following TCFD guidelines effectively reduced the cost of equity, it did not significantly impact the cost of debt. This could be due to Japan’s negative interest rate policy during the study period, which kept borrowing costs low. With the end of this policy in March 2024, interest rates in Japan are expected to rise, making sustainable linked loans, which offer low-interest rates for decarbonizing energy transition, increasingly popular. In the future, corporate climate change actions in Japan could further lower the cost of debt.
Although the study focuses on Japan, it offers valuable insights for investors, companies, and policymakers worldwide by highlighting the connection between climate disclosures and capital costs. From 2022, companies listed in Japan’s prime markets must follow TCFD guidelines. While more companies are engaging in climate mitigation, they should consider additional strategies to improve their carbon performance.
“We hope our research provides the scientific evidence needed to support companies in developing new strategies, changing behaviors, and ultimately reducing emissions,” the authors conclude.
