Bold Climate Action Can be Great for Business, Study Finds

A study of more than 9,200 companies in the Asia-Pacific has found that strong and proactive management of a company’s carbon emissions can yield “tangible financial benefits” for businesses.

Two of the authors of the study, which examined companies from 13 countries in the Asia-Pacific region over the period 2002–2021, as well as the quality of national governance standards, said their findings shatter the myth that doing the right thing by the environment adds to the cost of doing good business.

They say that with the challenges of climate change intensifying, businesses are under increasing pressure from regulators, investors and consumers to take decisive action. In fact, they are convinced that climate action is becoming imperative – “an essential financial strategy.”

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Syed Shams and Sudipta Bose, who studied at universities in eastern Australia, said they and two colleagues assessed three common types of business risk – idiosyncratic risks faced by a particular company, systematic risks that affect the whole market, such as economic downturns, and total risks (a combination of the former).

They found that companies with a better carbon performance had “lower levels of risk in all three categories.”

‘Halo effect’ for listed companies

“Companies that took active steps to manage and reduce their carbon emissions enjoyed less volatility in their stock prices, diminished firm-specific risks, and weren’t as sensitive to market-wide economic shocks.”

For listed companies, climate action – or environmental accountability – has become important.

“There has been a seismic shift in how business’ behaviour is seen by the market and what we’ve come to expect,” they said in a report published on Tuesday (Sept 3).

“It’s a kind of halo effect. Firms with better carbon credentials are seen as better positioned for market success more broadly – whether in dealing with regulatory changes, business disruptions or risks to their reputation. That can all make them more attractive to investors.”

Over 40% of the companies involved in the study were in Japan, with 12% in Australia, 8.7% in China, 6.2% in Hong Kong, 7.7% in both Taiwan and South Korea, 4.8% in India, plus smaller numbers in Indonesia, Malaysia, New Zealand, the Philippines, Singapore and Thailand.

‘Lower borrowing costs, greater market valuation’

In countries with higher quality corporate governance standards, such as environmental regulations, effective law enforcement and anti-corruption measures, there was a stronger relationship between carbon performance and lower levels of risk, they said.

And those companies “are being rewarded with lower borrowing costs and greater market valuation.”

That suggested, they said, that measures like emission trading schemes, standardised climate change performance metrics, and national commitments to international climate agreements could enhance the financial benefits of carbon performance.

Having a ‘green’ business environment “creates strong financial incentives for firms to take action and allows them to align their own carbon reduction efforts with national and global goals.”

Some ’emerging economies’ in the region, like Indonesia, Thailand and the Philippines, had lower baseline levels of carbon performance than their more developed neighbours, but the authors said firms in ASEAN nations that adopt global best practice standards could “position themselves as leaders” in the shift to a low-carbon future.

“For investors, our research emphasises just how important companies’ environmental performance can be,” they said. “Firms with poor carbon performance may face higher risks in general. That can mean higher returns are required to compensate investors for these risks.”

“Firms taking meaningful steps to manage their carbon emissions are more likely to enjoy stable cash flows and lower volatility, which can boost investor confidence.”

For businesses, carbon management is no longer just an ethical or regulatory obligation, “it is a sound financial decision,” which they said they said could attract sustainability-focused investors, improve companies’ access to capital markets, and reduce their borrowing costs.”

And environmental accountability “will only get stronger.”