Financial effects of carbon risk and carbon disclosure: A review

Abstract

AbstractCarbon risk has generated significant adverse impacts on firms, investors and other stakeholders. Carbon disclosure may provide market participants with information to effectively manage risks and explore opportunities. We conduct a critical review of the growing literature in these fields and seek to examine the financial effects of carbon risk and carbon disclosure. A total of 78 papers, published in influential accounting, finance, business, economics and management journals between 2011 and 2021, are reviewed. We categorise the financial effects into four groups: financial performance, valuation relevance, cost of capital and risk profiles (measures). The proxies for carbon risk and carbon disclosure are summarised. This review demonstrates inconclusive relationships between carbon risk (carbon disclosure) and firms' financial measures. These inconclusive findings may result from different carbon risk (carbon disclosure) measures, financial performance measures, sample geographies, sizes and periods, and model specifications. This review further identifies and highlights future research opportunities in relevant areas and calls for more research work to understand the influence of climate change on firms' value and activities.