Research Problem:
Many developing countries, including Egypt, are still in the early stages of disclosing climate change information and its risks. Egypt has begun taking advanced steps in this direction, especially after hosting the United Nations Climate Change Conference (COP27). This conference aimed to take action on critical issues to address the climate emergency, such as urgently reducing greenhouse gas emissions, building resilience and adapting to the inevitable effects of climate change, fulfilling climate finance commitments for developing countries, and renewing global solidarity to implement the Paris Agreement.
In pursuit of sustainable development and the goals of Egypt’s Climate Change Strategy 2050, and following the success of the Financial Regulatory Authority in issuing the first green bonds in the Egyptian capital market (USD 100 million) for a company listed on the Egyptian Exchange (EGX) — directing the proceeds to finance environmental projects that use clean energy and mitigate factors leading to rising temperatures — awareness has grown regarding the dangers of climate change to society and the irreparable nature of environmental damage.
Disclosure of climate change information is of great importance in the field of accounting and auditing because it enhances transparency and helps stakeholders make informed investment decisions aimed at reducing carbon footprints. Climate change disclosure provides clear information about the opportunities and risks associated with climate change, helping to bridge the information gap between investors and other stakeholders. Investors tend to direct their capital toward companies that follow sustainability practices and demonstrate a clear commitment to environmental responsibility. Therefore, comprehensive climate-related disclosure allows for the assessment of environmental risks that may affect a company’s financial performance.
Although financial statements and reports prepared under financial accounting standards are the primary source of information for investors and other stakeholders to make rational decisions, the rapid changes in the business environment — including economic and technological developments — and the increasing interest of stakeholders in information related to climate change and its risks (which affect companies’ long-term and financial short- term performance) have rendered traditional financial reports insufficient. It has become necessary to provide additional financial and non-financial disclosures to all stakeholders in order to reduce information asymmetry and ultimately improve the financial performance of companies.
In light of the above, the research problem can be formulated in the following main question:
What is the impact of climate change disclosure on information asymmetry and the financial performance of companies listed on the Egyptian Exchange?
This main question leads to the following sub-questions:
• What is the impact of climate change disclosure on information asymmetry?
• What is the impact of climate change disclosure on the short-term financial performance of companies, as measured by return on assets (ROA) and return on equity (ROE)?
• What is the impact of climate change disclosure on the long-term financial performance of companies, as measured by firm value?
2. Research Objectives:
The primary objective of this research is to study the impact of climate change disclosure on information asymmetry and the financial performance of companies listed on the Egyptian Exchange. This main objective can be achieved through the following sub-objectives:
• Demonstrate the impact of climate change disclosure on information asymmetry.
• Determine the impact of climate change disclosure on the short-term financial performance of companies (as reflected by ROA and ROE).
• Determine the impact of climate change disclosure on the long-term financial performance of companies (as reflected by firm value).
3. Research Importance:
Scientific Importance: This research contributes to the accounting literature by focusing on a relatively recent topic in the Egyptian context. Analysis of the impact of climate change disclosure on information asymmetry and financial performance in Egypt is new compared to many developed countries, to the best of the researchers’ knowledge. The importance of this topic has grown, especially after Egypt hosted the COP27 climate conference. One of COP27’s most important outcomes was the expansion of clean technology use to reduce carbon emissions. Additionally, Egypt’s National Climate Change Strategy 2050 aims to address climate change challenges and promote sustainable development.
Practical Importance: The research provides empirical evidence from the Egyptian Exchange (an emerging market) on the impact of climate change disclosure on information asymmetry and corporate financial performance. It supports Egypt’s Vision 2030 by encouraging a transition to a green economy, reducing environmental pollution, and enhancing sustainability. By promoting the issuance of transparent reports disclosing environmental and climate information, this research helps improve companies’ financial performance and enables investors and stakeholders to make more informed investment decisions.
4. Research Limitations:
Spatial Boundaries: The research is limited to companies listed on the Egyptian Exchange that are obligated to disclose climate change information (e.g., per TCFD and ESG guidelines) in accordance with the Financial Regulatory Authority’s Decisions No. 107 and 108 of 2021.
Objective Scope: The research focuses on the impact of climate change disclosure on information asymmetry and financial performance. It is confined to companies listed on the Egyptian Exchange, excluding those in the banking and financial services sectors due to their distinct nature and regulatory rules. Furthermore, the generalization of results is conditional on the limitations of the applied study.
Time scope: The research covers the period 2022–2023, which is when the Financial Regulatory Authority’s climate change disclosure index was first implemented (pursuant to Decisions No. 107 and 108 of 2021).
5. Research Hypotheses:
The hypotheses of this research can be formulated as follows:
• First Main Hypothesis (H1): There is a statistically significant impact of climate change disclosure on information asymmetry.
• Second Main Hypothesis (H2): There is a statistically significant impact of climate change disclosure on the financial performance of listed companies.
From the second main hypothesis, three sub-hypotheses are derived:
• H2a: There is a statistically significant impact of climate change disclosure on return on assets (ROA).
• H2b: There is a statistically significant impact of climate change disclosure on return on equity (ROE).
• H2c: There is a statistically significant impact of climate change disclosure on firm value (Tobin’s Q).
6. Research Plan:
Based on the importance of the research and to achieve its objectives, and in order to address the research problem and questions, the study is structured as follows: The first section presents the general framework of the research. The second section reviews the relevant accounting literature on the research variables and develops the hypotheses. The third section discusses the design of the applied study, including the development of the study’s models and the testing of hypotheses. The fourth section presents the analysis of the applied study’s results and the findings from hypothesis testing. Finally, the fifth section provides the conclusions, recommendations, and directions for future research.
7. Results:
The key findings from the theoretical and empirical analysis are as follows:
• Climate change disclosure and the reporting of associated risks are crucial, posing a challenge for accountants, shareholders, and all stakeholders. Companies should include in their annual or sustainability reports details on how climate change affects their operations. Disclosures should encompass information on carbon emissions, adaptation strategies, and risk mitigation efforts. Companies need to transparently identify and assess climate-related risks and opportunities, and determine the costs of climate change (such as the cost of emissions) to understand their impact on long-term financial performance.
• There are increasing efforts, both internationally and locally, to enhance guidelines for climate change disclosure — including reporting on greenhouse gas emissions, carbon and fossil fuel usage, and other climate-related risks — that affect companies’ financial statements. These efforts also emphasize a shift toward clean industries to reduce emissions and achieve sustainable development.
• There is a significant negative impact of climate change disclosure on information asymmetry, which support the first main hypothesis (H1).
• There is a significant positive impact of climate change disclosure on return on assets (ROA), which support the first sub-hypothesis (H2a).
• There is a significant positive impact of climate change disclosure on return on equity (ROE), which support the second sub-hypothesis (H2b).
• There is a significant positive impact of climate change disclosure on firm value (Tobin’s Q), which support the third sub-hypothesis (H2c).
• Overall, these results confirm the second main hypothesis (H2) that climate change disclosure has a statistically significant impact on the financial performance of companies.
8. Recommendations:
In light of their findings, the researchers recommend the following:
- Regulators on the Egyptian Stock Exchange should establish more detailed climate change disclosure requirements, including climate risks, mitigation strategies, and carbon emissions, to ensure greater transparency in reporting.
-The Financial Regulatory Authority (FRA) must require companies to implement IFRS S1 and S2 standards simultaneously, starting January 1, 2024, in addition to FRA Decisions No. 107 and 108 of 2021. Climate change disclosures must be made through electronic platforms in a clear and accessible manner, contributing to the move towards a low-carbon economy.
- Strengthening good governance mechanisms, such as appointing specialized sustainability committees within companies, to ensure adequate disclosure of climate change risks and their financial impact on companies. Shareholders should also be made aware of the importance of monitoring companies' commitment to climate change disclosure, which reduces information asymmetry between management and all stakeholders.
- Promoting green economy policy in Egypt by establishing green investment funds that focus on companies committed to climate change disclosure and implementing environmental sustainability strategies.
- The Financial Regulatory Authority's efforts to support the voluntary carbon market established in 2024 must continue as an important step in supporting the country's efforts to mitigate climate change. This is in line with global environmental initiatives and Egypt's Vision 2030.
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