Unpacking climate risk transparency in emerging and frontier markets of sub-Saharan Africa

Abstract

As the impact of climate change continues to draw the attention of global stakeholders, climate risk transparency under emerging climate initiatives has assumed a global perspective. However, very little empirical explanation has been provided on climate risk transparency in emerging and frontier markets whose contribution to climate change is negligible, yet such markets are highly vulnerable to climate risks. This study examines the extent of climate risk transparency in three emerging and frontier markets of sub-Saharan Africa with the aim of determining its quality, determinants, and consequences. Using content analysis, GMM method, and a sample of 1,912 firm-year observations of non-financial companies from Ghana, Kenya, and South Africa over the period 2015 to 2022, the study constructed a 19-item index based on the Taskforce on Climate-related Financial Disclosures (TCFD) and the new sustainability standards of IFRS Foundation (IFRS S1 and S2) and examined how coercive, normative, and mimetic forces influence the quality of climate risk transparency. The study finds a low-quality climate risk transparency among non-financial companies in the three markets. The study also finds a cross-market variation and growth in quality of reporting which is associated with the adoption of emerging climate frameworks such as TCFD and IFRS S1 and S2. In addition, the study evidences that climate transparency is influenced by regulatory environment, operating in highly polluting industries, and existing framework adoption, but may not be influenced by affiliation with foreign companies. The results also show that climate transparency has an impact on corporate market value and financial performance. However, corporate financial distress and cost of capital are not impacted by climate transparency. In addition to GMM, additional tests providing further mitigation for endogeneity and self-selection, including the two-stage least squares, propensity score matching (PSM), and fixed effect regression show that the study’s results are robust. While filling a gap in the sub-Saharan African context which is underexplored, the study contributes to the climate change discourse by highlighting the significance of novel climate initiatives such as the TCFD and IFRS S1 and S2 in ensuring the transparency of climate information to investors and capital markets in emerging and frontier market context. In addition, it provides relevant insights for jurisdictions which are preparing roadmaps for the adoption and implementation of emerging climate initiatives. It also offers policy recommendations aimed at strengthening climate transparency and providing relevant institutional frameworks in climate vulnerable emerging and frontier markets.