Corporate carbon risk, voluntary disclosure, and cost of capital: South African evidence

The study examines the interplay among corporate carbon risk, voluntary disclosure, and cost of capital within the context of South Africa, a rising power in the climate policy debate. We develop a system of simultaneous equations models and analyze data drawn from firms traded on the Johannesburg Securities Exchange (JSE), for the period 2010 to 2015, using the three-stage least squares procedure. We find that voluntary carbon disclosure is associated with lower overall (and equity) cost of capital, after controlling for corporate carbon risk. We also find that firms with higher carbon risk tend to provide better quality carbon disclosure and signal the possibility of high carbon risk to avoid negative market reactions resulting from concealing carbon information. Although the capital market does not appear to incorporate individual firm's carbon risk exposure into the required cost of capital, we find that it generally requires higher returns for companies operating in carbon-intensive sectors. These findings suggest that firms could exploit the virtues of voluntary carbon disclosure to reduce their overall (and equity) cost of capital. Our findings also imply that regulators and policymakers could point to the cost of capital reducing role of voluntary disclosure to lure firms into voluntarily providing superior quality carbon disclosures.