How corporate climate change mitigation actions affect the cost of capital

Abstract

Japan has been at the forefront of global efforts to accelerate climate change mitigation. Japanese firms have led in the development of decarbonization technologies and have positively disclosed climate change-related information based on the Task Force on Climate-related Financial Disclosures recommendations to address climate change. We explore the relationship between corporate climate change mitigation actions and the cost of capital for 2100 Japanese listed companies from 2017 to 2021. The results reveal that a higher carbon intensity correlates with an increased cost of equity, debt, and weighted average cost of capital. Interestingly, although climate-related information disclosure is associated with an increased cost of debt, it concurrently lowers the cost of equity and overall capital. This research recommends strategic approaches for firms to reduce their costs of capital while proactively combating climate change, highlighting the divergent responses of equity and bond markets to decarbonization initiatives.