Corporate Carbon Emissions and Financial Performance: Does Carbon Disclosure Mediate the Relationship in the UK?

Abstract

Academic debate relating to the link between corporate environmental disclosures, environmental performance and financial performance is persistent and controversial. In this paper, we investigate whether and if so, how, carbon emission performance is related to corporate financial performance and how disclosures of carbon emission in the annual and standalone reports mediate such relationship. Specifically, we construct a 42-item disclosure index to quantify the quality of corporate carbon emission information of 62 FTSE 100 companies from the period of 2010 to 2012. We find that while carbon emission is negatively associated with financial performance, it is positively related to the level of carbon disclosures which then lead to better financial performance at a marginal significance level. The findings show that market responses to excessive carbon emission; however, companies with poor carbon performance tend to use disclosure strategically to manage the legitimacy threat and to reduce the information asymmetry.