The financial effects of greenhouse gas emissions

Purpose This study aims to analyse carbon emissions’ (CE) impact on New Zealand-listed entities’ firm performance before adopting legislation for mandatory climate disclosures. Design/methodology/approach The study uses a fixed effects regression model to examine the impact of CE on Tobin’s Q, the return on assets (ROA) and the return on equity (ROE). The sample comprised 97 New Zealand Stock Exchange companies, representing 90% of total market capitalisation. Findings CE are significantly and negatively associated with firm performance, as measured by Tobin’s Q (a market-based measure). The negative impact is significant, with an estimated 48.74% decline in the mean Tobin’s Q, highlighting the substantial effect of CE on firm valuation. However, CE shows no significant statistical association with the accounting-based measures of ROA or ROE. The results also show that in a voluntary reporting regime, companies disclosing emissions are penalised more with reduced firm value than those that do not disclose. Practical implications The study serves as a reference point to examine the impact of CE on the firm performance of New Zealand-listed entities before the mandatory climate disclosures came into effect. The results support mandatory disclosure to create transparency and competitiveness in financial markets in relation to CE. Originality/value The study improves understanding of the impact of CE on a firm’s performance. It contributes to the accounting literature and informs policymakers, investors and firms of the economic impacts of CE disclosures before mandatory disclosure legislation.