Corporate risk and greenhouse gas emissions: evidence from Korea

ABSTRACT

Concerns regarding climate changes and greenhouse gas (GHG) emissions have been growing in recent years. Nonetheless, firms are claiming their business burdens in GHG reduction. This study examines whether and how corporate risk is associated with GHG emissions. The previous literature suggests two opposing hypotheses regarding the association. Firms may invest in environmental issues only when firms do not face severe risks in the market. In contrast, environmental efforts could be made strategically to win market competition. By using a firm-level GHG emission dataset in Korea, we find that firm- and market-level risks are positively associated with GHG emissions, supporting the former hypothesis. This result is robust to several measures of corporate risks and GHG emissions. This study provides policy implications related to GHG emissions reduction.

KEYWORDS:

• Greenhouse gas
• corporate risk
• market competition
• environmental performance
• carbon emissions

JEL CLASSIFICATION:

• Q50
• G32

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Note that Yu and Lee (2017) demonstrated that GHG reduction is underestimated in these indices.

² For detailed rules to estimate firm-level CO₂ emissions, see the enforcement ordinance from https://www.law.go.kr/ED%96%89%EC%A0%95%EA%B7%9C%EC%B9%99/(%ED%99%98%EA%B2%BD%EB%B6%80)%EC%98%A8%EC%8B%A4%EA%B0%80%EC%8A%A4%EB%B0%B0%EC%B6%9C%EA%B6%8C%EA%B1%B0%EB%9E%98%EC%A0%9C%EC%9D%98%EB%B0%B0%EC%B6%9C%EB%9F%89%EB%B3%B4%EA%B3%A0%EB%B0%8F%EC%9D%B8%EC%A6%9D%EC%97%90%EA%B4%80%ED%95%9C%EC%A7%80%EC%B9%A8 (in Korean).

³ The return on the Korea Composite Stock Price Index (KOSPI).

⁴ The HHI is a widely used proxy for product market competition and equals the sum of the squared market shares of all firms in an industry. A market with a small HHI is considered a competitive market and a high HHI is highly concentrated, meaning less competitive.

⁵ The C_ratio is calculated as the sum of the market share percentage held by the four largest firms in the market. The C_ratio ranges from 0 to 1, and a higher value is considered lower competition.