Carbon disclosure, carbon performance, and cost of capital

Abstract

More and more firms are voluntarily disclosing carbon information as a response to the challenge of climate change. This research investigated the interactions among carbon disclosure, carbon performance, and the cost of capital. Because unobservable overall strategic decisions by management affect each of these outcomes and phenomena, we used a simultaneous equations model to analyse our data. We used data from S&P 500 firms that participated in the Carbon Disclosure Project (CDP) in 2010. We found that the cost of capital is negatively associated with carbon disclosure, which is consistent with voluntary disclosure theory. This relationship is weaker for firms with good carbon performance. In addition, there is an inverse relationship between carbon disclosure and carbon performance, which is consistent with legitimacy theory. Our results suggest that voluntary carbon disclosure is a rational choice that firms make to reduce the pressure exerted by legitimacy threats and to lower the cost of capital.