Does cost of debt reflect the value of quality greenhouse gas emissions reduction efforts and disclosure?

Abstract

Using a sample of North American companies reporting to the CDP (formerly Carbon Disclosure Project), we investigate whether details of companies’ carbon management practices reduce the cost of debt associated with greenhouse gas (GHG) emissions, with credit risk ratings as a proxy for cost of debt. Specifically, employing structural equation modeling (SEM) for the main analysis and three-stage least squares (3SLS) regression for further in-depth analysis, we simultaneously, yet separately, study the effect of detailed GHG emissions performance and assured GHG emissions disclosure on the cost of debt. Based on the theory of voluntary disclosure, our findings suggest that providing details about the implementation of many diverse GHG emissions reduction projects and assuring GHG emissions disclosure provides integrity to carbon management practices and, therefore, decreases cost of debt. Furthermore, we find that a reduced cost of debt assists companies to invest more in GHG reduction related projects. We recommend that further research considers aspects of voluntary disclosure that add to its integrity.