The impact of firm performance and carbon emissions on the cost of capital for the Johannesburg Stock Exchange (JSE) listed firms.

Abstract

The study investigated the impact of firm performance and carbon emissions on the cost of capital for the Johannesburg Stock Exchange (JSE) listed firms. The mining firms listed on the JSE were selected as the sample, and they were observed for a period of 5 years starting from 2018 to 2022, which amounted to 75 observations. A quantitative methodology, which used panel data and the Panel Least Squares regression model, was employed, using both fixed and random specifications. The study focused on a historical analysis, which made use of quantitative secondary data through secondary analysis. Sources of relevant secondary data include firms that gather information on climate change, carbon reporting, and financial performance on listed firms. The study employed two independent variables (carbon emissions and firm performance) and one dependent variable (cost of equity capital). Carbon emissions were calculated as an inverse value of carbon intensity (scope 1 & 2 emissions). Firm performance was indicated by return on assets (ROA), return on equity (ROE) and firm size. Financial leverage, book to market ration and market beta were employed as control variables. The study found that carbon emissions have a nonstatistically significant negative relationship with the cost of capital, which implies that the higher the carbon emissions intensity, the lower the cost of equity capital. Furthermore, it showed that firm performance also has a non-statistically significant negative impact on the cost of capital, which implies that the greater the firm performance, the lower the cost of equity capital. The findings further indicate that carbon emissions influenced return on assets and firm size negatively. This is because firms that are capital intensive tend to have higher carbon emissions, which results in lower return on assets. In addition, leverage also has a negative association with return on assets because leverage increases the risk of bankruptcy and default, thus affecting firm profitability/performance. This study provides insight into how carbon emissions and firm performance affect how much investors are willing to invest in a company (cost of equity capital) and how environmental issues such as climate change affect the cost of equity of listed firms.