As the challenges of climate change grow, businesses are feeling increasing pressure to take action.
To avert disaster, this may have to transcend simply following latest regulations and minimum standards. Business must lead in good faith.
Yet taking daring action on climate change remains to be too often presented as a compromise of sorts – because taking action comes at a value, doing good for the environment comes at the expense of doing good business.
Our latest research challenges this myth. We found that improving carbon efficiency can transcend solving environmental problems and deliver tangible financial benefits.
Our testA study covering almost twenty years of information from corporations in the Asia-Pacific region finds that higher carbon management is related to significantly lower financial risk.
This is proof that taking action isn’t any longer just an environmental requirement, but also a very important financial strategy.
Lower risk in every category
The Asia-Pacific region is home to some the world’s largest carbon dioxide emittersincluding China, Japan and South Korea.
Businesses operating in the region are facing increasing pressure from regulators, investors and consumers to scale back their environmental impact.
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Our tests examined over 9,000 annual observations (comparable to annual reports) from 13 Asia-Pacific countries from 2002 to 2021. The study aimed to look at the relationship between carbon efficiency and three common varieties of business risks: idiosyncratic, systematic, and total risk.
Idiosyncratic risks are people who a particular company faces, while systematic risks are people who affect the entire market, comparable to economic crises. As you may expect, total risk combines all of them.
We found that higher corporate carbon performance was related to lower levels of risk in all three categories.
Companies that actively took action to administer and reduce their carbon emissions enjoyed lower stock price volatility, lower company-specific risk and were less sensitive to market-wide economic shocks.
The absolute risk reduction varied from 1.22% in Taiwan to as much as 4% in Australia.
These lower risk levels reflect more than just these corporations being higher at following the rules. There has been a seismic shift in how the market views business behavior and in what we expect.
It’s a form of halo effect. Companies with higher carbon credentials are seen as higher positioned to achieve the broader marketplace—whether it’s coping with regulatory changes, business disruptions, or reputational risks. All of that could make them more attractive to investors.
Stronger management, stronger effect
Our study also found that in countries with higher standards of corporate governance – including aspects comparable to environmental regulations, effective law enforcement and anti-corruption measures – there was a stronger association between carbon efficiency and lower levels of risk.
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What drives this effect? It is most probably that in countries with strong governance frameworks, corporations with solid environmental credentials are rewarded with lower borrowing costs and better market valuations.
This teaches policymakers a very important lesson.
It suggests that implementing measures comparable to emissions trading systems, harmonised climate change performance indicators and national commitments to international climate agreements could bring increase financial benefits carbon efficiency.
Creating such a business environment creates strong financial incentives for corporations that take action and allows them to align their very own carbon reduction efforts with national and global goals.
Unique challenges offer unique opportunities
Despite the obvious benefits of improving carbon efficiency, businesses in the Asia-Pacific region face some unique challenges.
Emerging economies in the region, comparable to Indonesia, Thailand and the Philippines, often have lower base levels carbon efficiency in comparison with their more advanced counterparts.
This is basically on account of differences in how strict regulations are, what key government institutions are able to, and lower levels of economic development. But these challenges are also opportunities.
Businesses operating in these emerging markets have a possibility to proactively adopt global best practices and lead the transition to a low-carbon economy.
What can we learn?
Our research delivers necessary insights for investors, corporations and all of us.
For investors, our research highlights how necessary an organization’s environmental performance could be. Companies with poor carbon performance may face higher risks overall. This could mean that higher returns are required to compensate investors for those risks.
On the other hand, corporations that take significant steps to administer their carbon emissions are more prone to have stable money flow and lower volatility, which might boost investor confidence.
For businesses, the message is obvious. Investing in carbon management is just not just an ethical or regulatory obligation – it’s a sound financial decision.
By improving their carbon performance, corporations can lower their overall risk exposure, attract sustainability-minded investors, improve their access to capital markets and lower their borrowing costs.
Strong climate action doesn’t must be a compromise. As the world faces the challenge of living with climate change, the link between environmental responsibility and financial performance will only grow stronger.
