[Paper commentary] Clarifying that corporate climate change action reduces the cost of capital.
~Data analysis of 2100 Japanese companies reveals relationships~.

21 May 2024, in a paper by Shunsuke Managi, Representative Director, Keely Alexander Ryuta, Director and Chief Researcher, and Hidemichi Fujii, Professor, Graduate School of Economics, Kyushu University, and others, examining 'The impact of corporate climate change measures on the cost of capital and its reflection on corporate value'.

The research results have been published in the preliminary online edition of Corporate Social Responsibility and Environmental Management (2022 Impact Factor: 9.8), a top journal in the field of environmental economics and environmental management.

How corporate climate change mitigation actions affect the cost of capital

This report will explain the content of the above paper.


This study examines the impact of corporate climate action on the cost of capital.

As the climate change problem becomes more serious, investors and financial institutions are increasingly demanding that companies reduce their greenhouse gas (GHG) emissions, but the economic benefits to companies of taking action on climate change have not been fully considered.

By analysing data using carbon performance, climate-related information disclosure and corporate commitment to climate change as indicators, this study shows that corporate climate change action is effective in reducing the cost of shareholder capital, and that this effect is significantly observed in industries where climate change issues are a key challenge. The results of the study were as follows.

Background and objectives

In order for companies to use the capital they raise to create value, they must generate profits that exceed the cost of capital.

The return investors expect on a company's business activities is called the cost of equity, and the cost of equity is affected by the uncertainty of business activities, including climate change risk. Investors perceive high risk and expect high returns on investment issues with high uncertainty. Similarly, financial institutions provide loans in line with the uncertainty of the companies in which they invest.

In this context, investors and financial institutions are increasingly interested in companies' climate change measures in view of the fact that uncertain climate change risks are increasing year by year.

Climate change risk refers to physical risk (e.g. more severe extreme weather events associated with climate change) and transition risk (e.g. policy changes or behavioural changes to cope with climate change), and an increase in these risks can have an adverse impact on the business activities of the investee and may prevent the expected returns from being recovered. In light of this, unexpected losses can be avoided if climate change risks can be identified in advance and investment and financing decisions can be made in a way that takes into account the degree of risk.

The authors considered that if climate change action has the effect of reducing the cost of capital, then climate change action may lead to the creation of corporate value through a reduction in the cost of capital.

The study therefore aimed to identify the following

Does the carbon performance of companies have a positive impact on the cost of capital?
Is corporate climate-related disclosure under the TCFD negatively correlated with the cost of capital?
Is corporate commitment to climate change negatively correlated with the cost of capital?


To address the above issues, the authors examined the Cost of Equity (CoE), Cost of Debt (CoD) and Weighted average cost of capital (WACC)*1 to identify in detail the factors affecting the cost of capital. The study examined each of the three indicators (Cost of Equity (CoE), Cost of Debt (CoD) and Weighted average of cost of capital (WACC)).

Three aspects of corporate climate action are used: carbon performance (CO2 emissions/sales), disclosure of climate-related information in accordance with the Task Force on Climate-related Financial Disclosure (TCFD) and corporate commitment to climate change.

The analysis used data from approximately 2,100 listed Japanese companies for the period 2017-2021 to analyse the relationship between corporate climate change measures and the cost of capital.


The analysis yielded the following results.

1. poor carbon performance is shown to increase CoE, CoD and WACC, with a higher cost of capital being required if a company emits more CO2 relative to its turnover.

2. the disclosure of climate-related financial information in accordance with TCFD recommendations has the effect of lowering the CoE and WACC.

1. about.

Table 1 shows the magnitude of the impact of carbon performance on CoE, CoD and WACC.

In (1) and (3), the coefficient of carbon performance (INTENSITY) is significantly positive. This indicates that higher carbon performance increases both CoE and CoD; checking columns (2), (4) and (6), which analyse carbon performance (INTENSITY_lag) lagged by one year, the coefficients are significantly positive for all indicators. These results suggest that if a company shows high carbon emissions relative to its turnover, it is likely to require a higher cost of capital.

In both the stock and bond markets, investors actively consider a company's carbon emissions and greenhouse gas emissions as an important factor in their investment decisions, which is a result of the link between high carbon emissions and financial risk, as well as policy regulations.

Table 1: Carbon performance and cost of capital

2. about.

Table 2 shows the impact of TCFD disclosures on the cost of capital.

In column (1), no statistically significant association between disclosure (DISCLOSURE) and CoE is identified, but when a one-year lag variable is incorporated, as in column (2), the coefficient for a one-year lagged disclosure (DISCLOSURE_lag) is 0.43, which is statistically significant at the 1% level. This lagged effect can be interpreted as suggesting that companies' compliance with TCFD recommendations in disclosing climate-related information has a certain negative impact on the CoE, albeit with a time lag of one year.

On the other hand, WACC showed similar effects to CoE, but for CoD, the results were inconsistent with the expected hypothesis that the cost of capital increases with information disclosure. Notably, despite the increase in CoD, disclosure (DISCLOSURE) is consistently associated with a decrease in WACC. This paradoxical result suggests that the benefits of disclosure in the equity market may outweigh the costs in the debt market, leading to a lower overall cost of capital.

In the stock market, disclosure of climate change-related information reduces information asymmetries and enables investors to make more informed decisions about a company's performance and long-term sustainability. This increased transparency may be a driving force behind lower corporate CoE.

Table 2: Climate-related financial disclosure task force (TCFD) and cost of capital


The study showed that corporate climate action can reduce the cost of shareholders' equity, and the effect was observed to be more pronounced in industries where climate change issues are a key concern.

These results are expected to be used as one of the scientific evidences of the impact of corporate climate change mitigation actions on the cost of capital. In addition, the results of this study's analysis can be expected to provide useful information for Japanese companies in developing effective policies to reduce the cost of capital and at the same time promote proactive responses to climate change issues.

1 Weighted average cost (WACC):
The weighted average cost of capital is the cost of capital that takes into account how much of the cost of shareholders' equity incurred in raising funds from investors and the cost of debt incurred when borrowing from banks and bonds, respectively, is used. It is generally an indicator of how much companies employing multiple funding sources spend on funding.


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[NEWS] An article elucidating how corporate climate change measures reduce the cost of capital was published in the Nikkan Kogyo Shimbun.
Clarifying that corporate climate action reduces the cost of capital.
Data analysis of 2100 Japanese companies reveals relationships/Kyushu University.