The Equity Value Relevance of Carbon Emissions

Abstract

This chapter presents a selected review of studies that speak to the two related questions of whether capital markets view a firm’s carbon emissions as value relevant and if so, the importance of mandated carbon disclosure in facilitating investors’ assessment. The empirical literature consistently documents an inverse relation between the volume of carbon emissions and firm value, suggesting that markets assess a latent carbon liability commensurate with the firm’s carbon emissions. Importantly, the more recent literature confirms significant benefits to mandated carbon emissions disclosures, largely related to the enhanced ability to benchmark a firm’s carbon performance relative to its industry or sector peers. These studies reveal that the assessed latent carbon liability is related to a firm’s relative carbon intensity rank and that both internal discovery and external pressure effects resulting from enhanced benchmarking, lead to reductions in carbon emissions.

Keywords: Value relevance, greenhouse gas emissions, carbon liability, mandatory carbon reporting