Corporate carbon performance on short- and long-term financial performance

Abstract

Carbon emissions have faced substantial regulations as it is considered a major attribute of climate change, an urgent global issue. Various stakeholders, such as governments, investors and consumers have manifested concerns regarding corporate carbon emissions as it may be considered as business risk in the future. As climate change becomes a material issue for businesses, it is essential to examine whether a company’s continued mitigation efforts are reflected in its value and rewarded by the market. To capture this phenomenon, this article employed two different measurements: carbon performance and improvement in carbon performance. Based on 711 firm-year observations in KOSPI market from 2018 to 2020, the result showed negative association between carbon emissions reduction and short-term profitability, measured in ROA. The long-term financial performance measured by Tobin’s q is demonstrated to have positive relationship with good carbon performance or less carbon emissions. The result indicates the need for more consistent and stringent policies that encourage companies to make long-term investments to improve their carbon performance.