Climate change performance and financial distress

Given the crucial role that environmental accounting plays in sustainable development, this study investigates the relationship between climate change disclosure performance (CCDP) and financial distress as well as the moderating impact of litigation, the existence of a risk committee, the employment of Big4 auditing firms and the level of audit fees. Utilising a sample of the top 300 Australian Securities Exchange (ASX)-listed non-financial firms over the period 2008-2019 and ordinary least squares (OLS) regression analysis with fixed effects, it is found that higher levels of CCDP are related to lower levels of financial distress. Additionally, the significant association between CCDP and financial distress is manifested in firms with low litigation risk, firms with a risk committee, firms that employ Big4 auditing firms and firms that incur a higher level of audit fees. Additional tests that mitigate self-selection and endogeneity, such as propensity score matching (PSM) and the system generalised method of moments (GMM), show that our findings are robust. Finally, our findings shed light on managers' strategic behaviour in relation to the consideration of, and transparency around, climate change risks.

Automated summary

This study examines the relationship between climate change disclosure performance (CCDP) and financial distress, as well as the moderating impact of litigation, the existence of a risk committee, the employment of Big4 auditing firms, and the level of audit fees. The findings suggest that higher levels of CCDP are associated with lower levels of financial distress. Moreover, this relationship is even stronger in firms with low litigation risk, firms with a risk committee, firms that employ Big4 auditing firms, and firms that incur higher audit fees. Additional tests confirm the robustness of these findings.