Businesses in high-emission industries such as manufacturing, transport and energy face greater corporate financial instability, a new study by Loughborough University has claimed.
Loughborough University’s study examined non-financial companies across 63 countries, covering close to two decades of data (2003 to 2021), and found a ‘strong link’ between carbon emissions and financial instability.
‘Cost of inaction’
“The cost of inaction is now quantifiable,” commented Dr Freeman Owusu of Loughborough Business School. “Companies that continue to emit high levels of carbon are not only harming the environment – they are risking their own survival.”
According to the study, firms with a higher carbon risk, whether from direct emissions, indirect energy use, or pollution, were ‘consistently associated with lower financial stability’, due to increased operational costs and regulatory hurdles.
These risks are intensified in countries with high carbon emissions per capita, weak environmental governance, and low innovation capacity, as well as in a number of emerging and developing economies.
‘More volatile earnings’
Firms with high emissions ‘tend to experience more volatile earnings, lower Z-scores (a key measure of financial health), and reduced investor confidence’, the study noted.
Conversely, having strong corporate governance, environmental innovation and ‘robust’ financial resources were all effective factors in tackling direct (Scope 1) emissions. Scope 2 and Scope 3 emissions, however, still remain difficult to mitigate due to lower disclosure and reliance on external actors.
“The findings send a clear message to corporate leaders, investors and regulators – that carbon risk is not just an environmental issue, it’s a core financial one,” Owusu added. “From rising compliance costs and regulatory risks to reputational damage and investor distrust, carbon emissions are no longer just an environmental issue – they are a serious business risk.
“In a world shaped by climate change, long-term profitability depends on taking responsibility for emissions today.” Read more here.
