Companies gain trust and reduce costs through climate protection

The escalating climate crisis, marked by frequent extreme weather events, underscores the significant role that companies, especially emissions-intensive industries, play in global carbon emissions. Many companies are now taking proactive action on climate change by reducing their carbon footprint and being transparent about their environmental strategies.

The Task Force on Climate-Related Financial Disclosures (TCFD) provides a framework for companies to disclose climate-related financial information, helping them to manage the risks and opportunities of climate change.

Support for TCFD has grown, with Japan leading the way in such disclosures. However, the specific benefits of TCFD disclosures on a company’s financial performance remain little researched.

To solve this problem, a research team from Kyushu University analyzed data from around 2,100 listed Japanese companies over a five-year period (2017-2021). Published in Corporate Social Responsibility and Environmental ManagementThis study is one of the first to use comprehensive TCFD and corporate data in Japan.

“Some investors are strategically directing their funds into companies that are driving green innovation and the energy transition with the aim of promoting a low-carbon economy,” the researchers write.

“As a result, many companies will need to fundamentally revise their business models and strategies and move to practices that effectively reduce greenhouse gas emissions, including process improvements, emissions reduction plans, increased investment in green technologies and the production of climate-friendly goods.”

Climate protection through companies

The researchers examined the impact of companies’ climate protection actions – including their carbon footprint, climate-related disclosures and corporate commitments – on the cost of capital, i.e. the costs a company incurs to finance its operations.

The results show that higher carbon emissions lead to higher borrowing and capital procurement costs. However, companies that adhere to the TCFD guidelines and share climate data transparently benefit from lower capital costs.

Simply promising to take action on climate change does not have a significant impact on financial costs because those involved value actual actions over promises.

Risks of climate change create uncertainties

The main findings show that high greenhouse gas emissions increase the risks of climate change, such as extreme weather events and regulatory changes.

These risks create uncertainty and cause investors and lenders to demand higher returns, which in turn drives up the cost of equity and debt. The cost of equity is the return investors expect for buying company stock, while the cost of debt is the fee a company pays to borrow money.

Transparency in climate data

To reduce these uncertainties and enable investors to make informed decisions, transparency of climate data is crucial.

“When companies share climate-related data, investors and consumers get a clearer picture of their environmental efforts and are more willing to invest,” says study co-author Siyu Shen, a doctoral student at Kyushu University.

“We have found that this kind of openness is particularly important in energy sectors such as power and oil, where climate change is a major issue.”

Climate protection can reduce debt

While the TCFD policies effectively reduced CoE, they did not have a significant impact on CoD, possibly due to Japan’s negative interest rate policy during the sample period. This policy, which ended in March 2024, kept borrowing costs low.

With interest rates on the Japanese bond market rising, sustainable loans to decarbonize the energy transition at low interest rates are becoming increasingly popular. In the future, climate protection measures by Japanese companies could reduce borrowing costs.

Climate disclosures and capital costs

Although the focus of this study is on Japan, it provides insights for global investors, companies and policy makers by highlighting the link between climate information and the cost of capital.

Since 2022, companies listed on Japan’s major markets have been required to follow the TCFD guidelines. As more companies become committed to climate action, they should consider additional strategies to improve their carbon footprint.

Environmental economics studies, including this one, led Kyushu University professors Shunsuke Managi and Alexander Ryota Keeley to found aiESG, a startup that uses AI to analyze the sustainability of global supply chains.

Supporting companies in climate protection

The research team plans to expand its analysis globally to understand how regional regulations and cultural differences affect the relationship between climate change, carbon performance and capital costs.

“Given that investors are paying increasing attention to corporate environmental activities, it is imperative to clarify how investors respond to corporate actions to mitigate climate change,” the researchers noted.

Collaboration between investors, companies, scientists and policy makers is crucial to tackling the global climate crisis and achieving carbon neutrality.

“We hope our research will provide the scientific evidence needed to help companies develop new strategies, change behavior, and ultimately reduce emissions,” concluded corresponding author Hidemichi Fujii, a professor in the Faculty of Economics at Kyushu University.

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