Economic Consequences of Carbon Disclosure: A Review of the Literature

Climate change imposes a huge threat to the environment, society, and the global financial system. In response to this challenge, investors, governments, and stock market regulators are increasingly pressuring firms around the world to provide relevant disclosures about their carbon emissions, risk exposure level, and corporate strategies to manage climate-related risks. This chapter reviews the extant literature on the economic consequences of carbon disclosure, including firm performance, firm value, market response, and the cost of capital. The results show that carbon disclosure is positively related to financial performance. Nonetheless, this positive relation is not robust to different measures of a firm’s financial performance. Regarding firm value, previous research provides consistent findings that carbon emissions are negatively associated with firm value, while carbon disclosure is positively related to firm value. In addition, the extant results show that carbon disclosure has negative wealth effects on stock value because investors are concerned that the costs of tackling climate change issues can outweigh the benefits. Finally, carbon disclosure is negatively associated with the cost of capital, while carbon emissions are positively related to the cost of capital.