EFFECT OF CLIMATE CHANGE DISCLOSURE ON CORPORATE PERFORMANCE OF LISTED FIRMS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The acceleration in the forces of industrialization and urbanization have continued to increase the concentration of greenhouse gas emissions, hence contributing to more frequent and intense climate events across the world (Owolabi & Solarin, 2020; Aslam et al., 2021; Li et al., 2023). This intensification has come with deep ecological and socioeconomic ramifications. This is evident from the Global Risk Report (2020), where the growing climate awareness underlines possible accidental influences on financial performance. The top five risks include extreme weather events, failed climate action, natural disasters, biodiversity loss, and man-made environmental disasters.

It has also become one of the major challenges for economies and businesses in the modern age due to the huge impacts it causes on both financial performances and continuity concerns alike. With due consideration of its geographical location and socioeconomic structure, Nigeria is one of those countries that are regarded to be highly vulnerable to imparted climate change forces, hence its impact is felt very strongly on corporate performance.  The Intergovernmental Panel on Climate Change has pointed to the urgent need for mitigating climate change and adapting to these changes with a view to reducing economic disruptions and protecting prosperity over the long run.

Firms in Nigeria face complex sets of risks arising from climate change; these include physical risks from extreme weather events, regulatory risks from changing environmental regulations, and reputational risks from stakeholder pressure over environmental performance (Bui et al., 2020; Kurawa & Shuaibu, 2022; Akhanolu et al., 2023). These risks could be realized via several channels such as the financial performance indicators like revenues, profitability, and asset valuation of the firm. This in turn raises a growing demand for companies to improve the transparency and robustness of climate-related disclosure of corporate performance in order to give investors and stakeholders the opportunity to evaluate the level of climate-related risks and opportunities (Sawyer & Riffe, 2020).

Climate change refers to a process that where there is a change in temperature rise, elongated seasons of drought, risen sea levels, and decreased agricultural areas. This aspect impacts industries well since it has heightened the overall energy utilization and hence the cost of production for all the involved sectors (Ko & Tai, 2019; Gulluscio et al., 2020; Abbass et al., 2022). These climatic shifts have thus made many reconsider some of the traditional industrial practices as the world explores alternative fossil fuels and technologies of fuel application that reduce carbon emissions at the point of manufacture (Daromes, 2019; He et al., 2022). This shift agrees with international commitments, including the United Nations Framework Convention on Climate Change's Kyoto Protocol, signed by 32 developed countries in 1997. The following decades have given way to a rise in concentration and urgency regarding climate change issues that have shaped global economic approaches and sustainable practices (Secinaro, 2020).

The Nigerian government passed the Climate Change Act of 2021 into law due to the growing challenges posed by climate change; the law has so far influenced strongly how the issue of climate change disclosures, reputation management, and investor pressures are addressed by companies and listed firms in particular (Olujobi, 2024). These are manifold in implication-it is to establish a legal regime for GHG reduction and attain the feat of sustainable economic development. Full assurance is given therewith that Nigeria complies with her obligations under various international climate change agreements. With this, every sector, as well as all listed entities, is to align their operations toward the country's targets on climate. The central factor in this Act is the National Council on Climate Change, which coordinates the nation's efforts to tackle climate change and ensures that international agreements such as the Paris Agreement are aligned with (Federal Government of Nigeria, 2021). The activities of the council focus on setting targets on the reduction of emissions, developing policies on renewable energy, and guiding various programs on climate. The Act places emphasis on transparency and accountability in carbon emissions, hence it calls for periodic disclosure of such by firms, especially quoted ones, on the state of emission and mitigation measures (Federal Government of Nigeria, 2021). This supports the first objective of this study, which seeks to ascertain the impact that carbon emission disclosure would have on the performance of quoted firms in Nigeria.

Carbon emission disclosure also has manifold implications for the performance of a company. While reputation is improved and environmentally concerned investors also become attracted with better access to capital (Kehinde & Abifarin, 2022). The underreporting or nondisclosure leads to reputational loss, monetary penalties, and higher degrees of regulation. The Act indirectly influences reputation management by necessitating disclosures and making environmental standards so strict that companies have no choice but to march towards sustainability practices (Olawuyi, 2024; Salau, 2024). Reputation management in the context of climate change will include compliance with the law and corporate social responsibility initiatives that seem to express concern for sustainability. This is related to the second aim of the research work: to assess how reputation management impacts financial performance and reporting.

While the Climate Change Act provides any veritable framework for combating climate change, especially for listed firms in Nigeria, its implementation presents some challenges and opportunities for those companies (Tamuno & Ibanabo, 2023). Such compliances will involve colossal investments in new technologies and processes that can strain the financial resources of companies-especially smaller companies. Investments could, therefore, bring long-term cost savings and efficiency gains that position the firms as sustainability leaders. The Act can also focus on innovative business regarding renewable energy and sustainable practices that would enable companies to move into developing markets and help them to gain competitive advantage (Olujobi et al., 2021).

Due to the increasing demands on corporate environment practices as regards transparency and accountability, different frameworks for climate-related disclosure have been developed. These frameworks give guidelines that enable a firm to disclose environmental impact, risks, and strategies, which in turn increase investor confidence and stakeholder engagement. Key frameworks include the Global Reporting Initiative, International Sustainability Standards Board guidelines, and the sustainability guidelines issued by the Nigerian Exchange Group, NGX. Global Reporting Initiative remains one of the most utilized frameworks that report about sustainability. It is inclusive of extensive standards for organization-wide reporting on various environmental, social, and governance issues, including those related to climate. The GRI Standards are intended to be adopted by all organizations, regardless of their size or sector, and from whatever part of the world. GRI has special provisions that allow responses to climate-related risks, emissions data, and mitigation strategies, enabling firms to disclose relevant information in a structured and standardized manner (Emeka et al., 2021). By following the GRI guidelines, businesses will be able to enhance the quality and credibility of their climate-related disclosures; these help stakeholders make more informed decisions, from investors to regulators to the public. Beyond that, the GRI framework encourages consistency and comparability of the sustainability reports within and across organizations and sectors, thus fostering the capabilities of stakeholders to observe performance and developments over time. Therefore, suggested actions involve compliance with GRI guidelines to improve the quality and assurance of climate-related disclosures by businesses (Oladapo, 2022; Zahra et al., 2024).

The IFRS Foundation formed the International Sustainability Standards Board in response to an escalation of calls for consistency in sustainability reporting. The ISSB is committed to developing a comprehensive global sustainability reporting framework among priorities that include climate-related disclosures (Millar & Slack, 2024). This framework, developed by the ISSB, is going to mark an important milestone in the effort toward internationally harmonized sustainability reporting practices disclosures (Van & Els, 2023). The incorporation of climate-related disclosures into this framework is clear guidance from the ISSB to companies on the reporting of climate risks, data on greenhouse gas emissions, and the strategies of mitigation within their financial statements (IFRS Foundation, 2022). Moreover, the framework given by the ISSB will increase comparability and consistency in sustainability reporting across jurisdictions and industries. It is this consistency that will henceforth enable investors, regulators, and other stakeholders to make more informed decisions with regard to the environmental performance and resilience of companies, which in turn requires greater accountability and transparency from corporate reporting practices.

Recently, the Nigerian Exchange Group made some disclosures on sustainability guidelines to make the operations of listed companies more transparent and accountable (Razaq et al., 2023). These guidelines combine the best of practices around the world and focus on some key aspects of ESG disclosures, including those related to climate. These NGX guidelines have henceforth made it compulsory for all listed companies to disclose their ESG practices, thereby making full disclosures about the impact their business is having on the environment, sustainability-related initiatives, and arrangements for governance. The guidelines have hence outlined that entities must transparently disclose associated climate-related risks and opportunities regarding impacts on business operations, strategy, plans pertaining to the financial position over the future period's performance. It also encourages companies to develop and make public sustainability policies, therefore explaining their activities on climate change amongst other environmental concerns (Akinleye & Owoniya, 2024). Application of such rules would go a long way in enabling companies in Nigeria to enhance their sustainability performance, responsible investments, and equally contribute to national and global climate goals (Odum, 2023).

This huge transition to cleaner forms of energy has indeed marked a number of industries, most especially in the production of vehicles, which clearly decreases dependence on conventional fossil fuels. According to Secinaro (2020), the environmental scandal at Volkswagen in 2015-popularly referred to as “Dieselgate” had involved a deliberate fraud in emissions tests conducted on its diesel vehicles. The scandal came into light when the researchers identified certain differences between the real driving conditions emissions and those in the laboratory tests (Gössling et al., 2017). This was because Volkswagen had fitted special "defeat devices" in its approximately 11 million new vehicles around the world. They could recognize whether the car was under an emissions test or not, and hence performed to that tune: their performance was tuned to come within regulatory limits only during standard laboratory tests, and soon after it accelerated into normal driving condition, the amount of pollutants it ran into greatly exceeded the thresholds. It has had huge financial implications in the form of billions paid out for fines, settlements, and vehicle buyback programs that Volkswagen has incurred. Besides, it took a big toll on the company's reputation and the resignation of several top executives. This huge transition to cleaner forms of energy has indeed marked a number of industries, most especially in the production of vehicles, which clearly decreases dependence on conventional fossil fuels. In this case, the attention taken by the environmental scandal of Volkswagen was used to point out the ethical and regulatory challenges of the automotive industry in trying to balance economic interests with environmental concerns.

Business responses to the increasing risks of climate change have been numerous activities aimed at reducing anthropogenic GHG emissions. These activities would definitely rhyme with the call for action taken by relevant bodies on the global platform, which include the Intergovernmental Panel on Climate Change and the International Energy Association. All these initiatives share a commonality in their goal of reducing the increase in global temperature and, subsequently the far-and-wide impacts instituted by climate change.

These climatic change mitigation strategies range from reduction in electrical energy emission, minimal process-related emission, evasion and reduction in carbon emission, mitigation involving fuel-related emission to mitigation management measures. This proactive stance is in tandem with the global initiatives championed by influential bodies like the Intergovernmental Panel on Climate Change and International Energy Association. The overarching goal of these initiatives is to restrict the rise in global temperatures and effectively mitigate the far-reaching impacts of climate change (Mollah, 2020).

The conventional system of financial reporting in Nigeria has been limited to financial and economic dimensions, which is actually insufficient to measure proper performance in some industries, such as mining and manufacturing (Chinh, 2020). There is an increasing need for more non-financial information disclosure to complement the deficiency in the quality of financial reporting (Rufus & Hamusideen, 2022; Nwankwoh et al., 2023). This recognition comes from the fact that traditional financial indicators do a poor job in disclosing all the complexity and wider implications that some industries have on both the economy and the environment (Lawal, 2019).

Narrowing to European Union, the European Parliament directives 2014/95/EU also calls for non-financial statements in congruence with international trends. The statements are supposed to contain environmental, social, and employee information as well as human rights issues (Muserra et al., 2020). Such disclosures are highlighted for non-financial aspects, with a focus on creating more comparability between nations within the European Union, thus creating transparency that shall enable the stakeholder to make decisions in a way that reflects the company operations and impacts comprehensively. As Papa et al. (2022) explain, through the Global Reporting Initiative, there is a detailed framework on sustainability reporting that guides organizations through processes on the disclosure of climate-related information within its various non-financial reports. Various issues, such as emission, climate risk, adaptation strategies, renewable energy usage, and value chain resilience, are opposed by GRI reporting companies. While GRI guidelines make sure that the reporting provided by companies over climate issues is presented in an understandable way, thereby helping to build trust and accountability among the stakeholders (Sethi et al., 2017). GRI, with its inclusivity approach, succeeds in empowering every organization to act boldly on climate change, thereby proving their commitment to environmental stewardship in the ways that befit a sustainable business environment-one that will pay its due dividends toward resilience in a responsible, global economy (Abeysekera, 2022).

Integrated reporting is designed to encompass financial and non-financial information to enable both providers and users of this information to gain a deeper grasp of performance and future perspectives. Climate change is also an important aspect of integrated reporting. Orazalin & Mahmood (2020) were of the opinion that it impacts multi-stakeholders in an important ways toward long-term value creation and organizational sustainability. The framework for integrated reports is holistic; it ensures that problems with the impacts of climate change span operation strategy and governance. This becomes useful in informed decision-making and elicits corporate reporting practices that are transparent and accountable (Traxler et al., 2020).

In June 2023, the ISSB disclosed two major standards: IFRS S1, about general requirements for disclosing sustainability-related financial information; and IFRS S2 dealt with climate-related disclosures (Martínez & Rodríguez, 2023). These two standards have been marking significant developments in sustainability reporting, giving clear guidelines to organizations on the way to report about ESG factors and climate-related impacts, risks, and opportunities. They work on increasing transparency, comparability, and reliability in sustainability reporting practices while keeping pace with the global initiative on climate change and sustainable finance (Van et al., 2024).Top of Form

1.2       Statement of the Problem

As sustainability issues increasingly came to the fore, investors, regulators, and the wider public have been increasingly demanding more information in the form of better and more transparent disclosures regarding how companies are responding to climate change. These drives could be specifically attributed to regulatory requirements, investor pressure, company governance principles and practices, and international standards and frameworks that guide such reporters (L’Abate et al., 2023). The identification and understanding of these drivers will, therefore, be vital in the formulation of pragmatic plans by both policymakers and the corporate leadership for enhancing climate issue reporting, as observed (Marwa et al., 2020). This could also facilitate dissolving long-standing barriers and ensure accountability and, more importantly, transparency within corporate operations. Recent works from Luo et al. (2022), Long et al. (2023), and Saha & Khan (2024) go even further in presenting the trends of levels of environmental disclosures by firms, hence insinuating that regulatory pressures among investors' demands equally influence such an area as befits critical investigation.

This can, in turn, significantly enhance an organization's reputation with the two other aspects-risk management and investor relationships-thereby setting the premise for the potential improvement in financial performance. Contrasting reports by Comello et al. indicate that comprehensive disclosure of emissions and investment costs for carbon reduction strategies ding profitability. The empirical studies such as(Alvi and Khayyam, 2020; Ogunwale et al., 2021; Clarkson et al., 2023; Dwarakanath et al., 2024) all show that firms with high-quality environmental disclosures have a tendency to be at an advantage over others in terms of financial performance because they increase investor confidence and, thus, can manage risks better. It is important in Nigeria's case to understand how the dynamics plays out for corporate performance so as to provide actionable insights for corporate managers and policymakers Iredele (2020). On the other hand, emerging regulations require firms to disclose their exposure to climate change risks and the risk capital set aside to mitigate such risks. Firms may also be compelled to disclose the way climate change influences the strategy and operational performance of the firm. While such disclosures are meant to give investors an appropriate comprehension of how companies manage climate change risks, they also lead to huge costs(Borghei, 2021). The companies may need to hire specialists to measure their precise exposure to a risk about climate change and estimate the quantity of risk capital. According to Cepni et al. (2024) and Veenema et al. (2023), the capital market regulator can make such disclosure requirements with a view to ensuring transparency and taking a forward-looking approach in managing climate change risk. If effective strategies and regulations are to be developed, the balance has to be understood between the benefits of enhanced transparency and the costs of compliance (Al-Hadi et al., (2019).

Climate-related disclosures involve analysing the breadth and depth of information provided by firms regarding their environmental impact and strategies to mitigate climate risks (Gupta & Krishnamurti, 2018). This would, in turn, depend upon the respective regulatory frameworks governing such disclosures of greenhouse gas emission, energy use, management of climate risk, and sustainability initiatives, perceived market expectations, and firm-specific capabilities with respect to data collection and reporting.

It would, therefore, innately indicate that the quality of disclosure would be in direct relation to the firm's means concerning data collection, analysis, and reporting on climate-related information. Most firms, however, especially in developing economies, lack the relevant technical expertise and resources needed to collect extensive environmental information. Recent surveys identify that while the awareness and reporting of climate-related issues are on the increase, there remains significant variability in the quality and consistency of disclosures among firms and industries.

Investors and consumers increasingly call for increased transparency with regard to environmental practices of corporations. Research evidence indicates that companies with superior environmental performance and disclosures tend to enjoy more investment and a good reputation in the market as compared to their rivals (Jia & Li, 2022). This makes market forces promote the demand for firms to improve their climate-related disclosures to meet the expectations set by various stakeholders. SMEs have limited financial and human resources and hence a number of difficulties stand in the way of climate reporting. According to Haque (2017), their disclosures are incomplete or not comparable, which limits their usefulness to stakeholders. In addition, big companies sometimes do not have standardized methodologies to measure and report environmental impacts, resulting in huge gaps in reported data and performance comparisons between companies becoming quite problematic to conduct.

Recent studies such as (Shahab et al., 2018; García-Sánchez et al., 2020; Secinaro et al., 2020), indeed depict an upward trend regarding the improvement in quality and completeness of climate-related disclosures. For instance, firms comprising sustainability indices, such as the Dow Jones Sustainability Index, are inclined to offer better-quality disclosures due to pressures to meet the stringency of the index threshold concerning reporting standards (García Sánchez et al., 2020). Secondly, companies with good corporate governance are likely to give qualitative features in climate disclosure so as to ensure that the environmental risk factors are managed at a strategic level and reported accordingly (Shahab et al., 2018) postulate that the volatility in climate affects companies' operations negatively because of the physical and transitional risks. Conversely, most disclosures on climate-related issues by many firms are superficial with scant information and often limited to qualitative information without quantitative data necessary for full assessment of environmental performance (Secinaro et al., 2020). These disclosures are made using inconsistent methodologies, which have the ultimate effect of making such disclosures difficult for stakeholders to use in decision making. The development and improvement of such challenges, as well as the standardization of methodologies, will be an important factor that could improve the transparency and usefulness of the disclosures of climate-related information.

Climate-related disclosures have immense impacts on corporate performance and investor relationship, risk management, and regulatory compliance (Ioannou & Serafeim, 2022). Full and transparent disclosures about climate change would improve the firm's reputation, add environmentally conscious investors, and improve access to capital. On the other hand, inadequate disclosures lead to increased scrutiny, regulatory penalties, and loss of investor confidence. Current research has shown that firms with higher sustainability disclosure scores perform generally better compared to their peers, be it from the stock market metrics or from such operational metrics as return on sales (Eccles et al., 2022).

1.3       Aim and Objectives of the Study

The paper, therefore, sets out to explore the effect of climate-related disclosures on the corporate performance of listed firms in Nigeria. The objectives of the study are to:

i.     assess the drivers of climate-related disclosures in listed firms in Nigeria;

ii.    assess the level of climate-related disclosure by listed firms in Nigeria;

iii.   assess mitigation and adaptation strategies of climate-related risks in reporting within the financial statements of listed firms; and

iv.   examine the effect of climate-related disclosures on the corporate performance of listed firms in Nigeria.

1.4       Research Questions

The study tend to provide answers to the following research questions:

      i.         What are the drivers of climate-related disclosure in listed firms in Nigeria?

     ii.         What is the extent of disclosure on climate-related issues by listed firms in Nigeria?

   iii.         What strategies are adopted by listed firms in mitigating and adapting to climate-related risk in financial reporting?

   iv.         What effect does climate-related disclosure have on listed firms' corporate performance in Nigeria?

1.5       Research Hypotheses

In the light of the stated objectives and research questions, the following hypotheses were tested in empirical terms:

Hypothesis One

H_o:      The identified factors are not significant drivers of climate-related disclosures in listed firms in Nigeria

H₁:      The identified factors are significant drivers of climate-related disclosures in listed firms in Nigeria.

Hypothesis Two

H_o:      Firms listed in Nigeria do not disclose climatic-related issues

H₁:      Firms listed in Nigeria disclose climatic-related issues to an unprecedented levels.

Hypothesis Three

H_o:      Firms listed do not apply mitigating and adapting strategies that are effective for climate-related risk while reporting their financial statements.

H₁:      Firms listed have used mitigating and adapting strategies that were effective for climate-related risk in financial reporting

Hypothesis Four

H_o:      Climate-related disclosures have no significant effect on the corporate performance of listed firms in Nigeria.

H₁:      The Climate-related disclosures have a significant effect on the corporate performance of listed firms in Nigeria.

1.6       Significance of the Study

The importance of the study is the possible contribution that it might give to add valuable insights to the academic and practical literature. In this paper, insight is given into the influence of climate change on the financial statements of listed firms in Nigeria, while at the same time giving an elaborative understanding of challenges and opportunities of businesses with regard to evolving environmental dynamics. This result is useful in the development of informed strategies that mitigate the risks associated with climate change, while seizing opportunities for sustainable growth by policymakers, regulators, and business leaders. The study is also relevant to the international discourse on climate change as it offers a case study within the Nigerian context that would adequately stimulate international discussions on the interface between environmental considerations and financial reporting. Seeing the challenge of the present call for sustainability ideals around the world, it is on the back of these insights that perhaps this study can help guide future research through policy formulation and corporate decisions toward a more robust and environmentally responsive business setting in Nigeria and beyond.

Hence, it will also help investors, analysts, and other stakeholders understand the financial implications of climate change in a better way, which would help them make decisions that are more informed and also encourage Corporate Sustainable Practices. In this regard, the importance of this study would lie in its possible contribution to closing an existing knowledge gap through the informing of already strategic decisions that, following this reasoning, contribute to a greater understanding of the dynamics of climate change and financial statements in the Nigerian business sphere.

1.7       Scope and Delimitation of the Study

The underlying research work focuses on listed firms in Nigeria and aims at in-depth investigation of the ways in which disclosure related to climate initiatives exerts its influence on corporate performance. In this regard, it has focused on aspects of risk disclosures and reporting practices in an effort to delineate the manifold impact of climate-related disclosure on listed companies regarding financial performance indicators. Multiplicity of industries, sectors ranging from manufacturing to services, is covered under the study.

The research were also designed to give a complete analysis of the different impacts of climate change in various sectors of the Nigerian economy and thus make for very valuable insights that shall be of great interest to stakeholders and policymakers alike.

The scope of the study limits itself to listed firms in the jurisdiction of Nigeria, hence excluding non-listed firms. It is in this light that this focus is placed on making sure that a pinpointed analysis relating to the influence of climate change on financial statements within the Nigerian context is handled and provides insight relevant to the local market and regulatory environment.

Also, generalization of findings can be confined to the single context of Nigeria alone and may not be directly applicable in different economic and cultural settings.

Lastly, this study will not extensively cover the broader socio-economic main effects of climate-related disclosure to the Nigerian people since it particularly focused on ascertaining how climate change influences corporate performance of listed companies. Acknowledging these limits is important to understand the various findings of the research, creating transparency of the boundary of the study, and helping to understand significantly about its contextual limits.

1.8       Operational Definition of Terms

Operational definitions of the key terms are provided in order to identify what exactly will be investigated. This clarity ensures precision and accuracy of the findings of the research that meaningfully contribute to the discourse on the intersection between climate change and corporate performance in listed firms in Nigeria.

Climate Change: These are long-term variations in the temperatures, precipitation, and other atmospheric conditions of life on Earth. In this paper, it shall include variations that have been attributed to human activities, specifically the increase in greenhouse gas emissions.

Corporate performance: refers to the degree to which an organization achieves its goals related to various corporate activities. It is a very broad general term that encompasses many dimensions of corporate success: for instance, financial results, market position, operational efficiency, social impact, and environmental impact.

Reduction of Greenhouse Gas Emission: The intentional reduction in the levels of gas such as carbon dioxide and methane, which contribute to the greenhouse effect, aimed at reducing the impacts of climate change.

Risk Disclosures: Degree to which disclosure on risk and uncertainties that may affect their financial performance in many aspects, for instance, on climate change.

Sustainable Practices: Business strategies and activities the firm adopts with concern for the environment and social responsibility coupled with ensuring longevity with at least minimal hurt to the ecosystem.

Carbon Reduction Campaign: The campaigns, whether global or national, to reduce carbon emissions enough to mitigate climate change.

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