Corporate carbon risk, voluntary disclosure and debt maturity

• Published date: 16 April 2020
• Date: 16 April 2020
• Pages: 667-683
• DOI: https://doi.org/10.1108/IJAIM-06-2019-0064
• Author: Tesfaye Taddese Lemma,Mehrzad Azmi Shabestari,Martin Freedman,Ayalew Lulseged,Mthokozisi Mlilo
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Corporate carbon risk, voluntary

disclosure and debt maturity

Tesfaye Taddese Lemma,Mehrzad Azmi Shabestari and

Martin Freedman

Department of Accounting, Towson University, Towson, Maryland, USA

Ayalew Lulseged

Department of Accounting and Finance,

University ofNorth Carolina at Greensboro,Greensboro, North Carolina,USA, and

Mthokozisi Mlilo

School of Economics and Finance, Faculty of Commerce, Law and Management,

University of the Witwatersrand, Johannesburg, South Africa

Abstract

Purpose –This study aims to investigatethe association between corporate carbon risk anddebt maturity

and the moderating role of voluntarydisclosure, within the context of South Africa, an emerging player in the

climate policydebate.

Design/methodology/approach –Based on the insights drawn from agency as well as information

asymmetry theories, the authors develop models that link debt maturity with corporate carbon risk and

voluntary disclosure and examine data obtained from companies listed on the Johannesburg Securities

Exchange(JSE), for the period 2011-2015.

Findings –The findings document that, other things being equal, debt maturity is significantly

higher, both statistically and economically, for companies w ith lower carbon intensity (risk). In

addition, high-quality carbon disclosure accentuates the positive associa tion between debt maturity and

the inverse of carbon intensity. The results are robust to alternative measures of corporate carbon risk

and issues of endogeneity. The findings are consistent with the view that lenders in S outh Africa use

debt maturity as a non-price mechanism to address borrower risk and grant lower carbon risk

companies that voluntarily provide higher quality carbon disclosures an even higher access to lon ger

maturity debts; JSE-listed companies could use voluntarycarbon disclosure to ease their access to debt

with longer maturity.

Practical implications –The findings of this study haveimportant implications to borrowers, pressure

groups, policymakersand other stakeholders.

Originality/value –To the best of the authors’knowledge, this study is the first to document evidence

suggestingthat lenders in South Africa use debt maturityas a non-price mechanism to address borrowerrisk.

Keywords Carbon intensity, Carbon risk, Voluntary disclosure, Debt maturity structure

Paper type Research paper

1. Introduction

Corporate carbon risk and its disclosure have received heightened research attention in

recent years mainly because of the potentialrisks the former poses on the ecological system,

health of the human population and survival of companies (Jung et al., 2018;Hossain and

Farooque, 2019). As the demand for risk reporting is increasing in general (Nahar et al.,

2016), a growing number of studies have examined how capital markets respond to

corporate carbon risk exposure and the mediating and/or moderating role of carbon

Voluntary

disclosure and

debt maturity

667

Received20 June 2019

Revised21 November 2019

27January 2020

20March 2020

Accepted26 March 2020

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 4, 2020

pp. 667-683

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-06-2019-0064

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

disclosure (Clarkson et al., 2015;Kolk et al.,2008). Investors prefer companies with lower

carbon emission and, thus, rewardthem with higher firm-value (Matsumura et al.,2014) and

reduced costs of capital(Jung et al., 2018). In other words, companies with higher carbon risk

pay more either in the form ofhigh cost of debt, high cost of equity or both. Lenders use both

price (i.e. interest) and non-price mechanisms –suchas covenant restrictions, debt priority,

debt maturity –to manage borrower risk (Armstrong et al., 2010). Stakeholders of

companies are also interested in the environmental performances of the companies, in

addition to the economic performances (Al Farooque and Ahulu, 2017), and there are

demands to know about company’s social and environmental performance from

stakeholders (Hossainand Alam, 2016).

This study is motivated by the increasing regulatory and policy attention paid to

corporate carbon emissions, theobserved lack of empirical evidence on whether lenders use

non-price contractual mechanismsto mitigate borrower’s carbon risk (Junget al.,2018) and

the need to examine the potential role of voluntary carbon disclosure within the context of

an “environmentally friendly”corporate governance setting (Lemma et al., 2019). With a

focus on South Africa, a setting in which the corporategovernance landscape is epitomized

by an “inclusive”approach that accommodates environmental sustainability issues (West,

2006), yet carbon disclosure is still voluntary, we examine whether lenders use debt

maturity as a mechanism to address borrowers’carbon risk and the potential role of

voluntary carbon disclosure in lenders’decisions. Some prior research has examined how

the debt market reacts to borrowers’carbon risk exposurethrough cost of debt (Jung et al.,

2018). However, the issue of whether lenders use non-price contractual mechanisms to

address borrowers’carbon risk exposure, and if so, whether companies can receive

favorable terms by increasing the quality of carbon disclosure has not received much

attention. We fill this gap in the literature by examining the association between corporate

carbon risk exposure and debt maturity and the moderating role of voluntary disclosure,

using the South African empiricalcontext.

We predict that the debt market will limit high carbon risk exposure companies’access

to long-term debt for two reasons. First, companies with higher carbon risk exposure face

higher default risk because of the increased uncertainty of their future cashflows resulting

from increased regulatory, physical, business and reputational risks (Chapple et al.,2013).

Second, lenders face higher risk ofreputational damage for doing business with borrowers

which have negative environmental impacts (Weber, 2012) through higher carbon

emissions. The longerthe term of the debt, the higher are both the default risk and the risk of

reputational damage because of creditors’association with high carbon risk companies.

Agency theoretic reasoning suggests that lenders, by providing debts with shorter

maturities, would be able to monitor borrowers more frequently (Smith and Warner, 1979),

induce borrowers intoproactively managing their carbon risk exposureand curb borrowers’

tendency to engage in overinvestment (Jensen, 1986). On the other hand, information

asymmetry arguments imply high-quality voluntary carbon disclosure can help allay the

negative impact of corporate carbon risk on debt maturity by reducing the information

asymmetry between insidersand outsiders, lowering monitoring costs and the perception of

default risk (Sengupta,1998).

Consistent with our predictions, we document a negative and economically significant

association between corporate carbon risk exposure and debt maturity; a one standard

deviation upsurge in the inverse of the corporate carbon risk exposure score, on average,

maps into a 3.6 per cent increase in the debt maturity of a company. This finding is in sync

with our argument that lendersand creditors, in South Africa, shorten the maturity ofloans

and credits that they grant to mitigate default and reputational risks associated with doing

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