2. Climate Change Disclosure in Accounting
Climate change disclosure (CCD) in accounting literature refers to the practice of providing detailed and transparent information in a company’s financial reports, statements, and official documents about the current, actual, and potential financial impacts of climate change on the company. This disclosure is essential for all categories of stakeholders, including regulators, investors, and the public, to build an overall view and understand how a company is dealing with and managing the opportunities and risks related to climate change (
Hassan 2023). Moreover, key elements of climate change disclosure (CCD) in accounting mainly include:
2.1. Risk Assessment
Climate change risk assessment in accounting involves the measurement, evaluation, and disclosure of the actual and potential financial risks that climate change poses to a company’s operations, assets, liabilities, and overall financial performance (
Zhang et al. 2023). This process is essential for managing and understanding the impact of climate-associated risks on a business’s ongoing financial stability (
Li et al. 2022). Therefore, companies need to identify and assess the climate change-associated risks that could affect their operations. These risks can be divided into two main factors: (a) Transition risks come from the shift to changes in market preferences, regulations, and technology, especially in a low-carbon economy. (b) Physical risks come from the physical impacts of climate change, such as extreme weather events, sea-level rise, and natural disasters (
Kim et al. 2022).
2.2. Financial Impacts
Disclosing the actual and potential financial impacts of climate change-associated risks on a company’s assets, liabilities, operations, and overall financial performance is crucial. This may involve evaluating and assessing the costs of adaptation, mitigation, or liabilities related to environmental aspects (
Saragih et al. 2021).
In addition, businesses should consider regulatory rules and requirements associated with climate change risk disclosure. In some countries, regulators are imposing requirements that mandate it to disclose climate-associated risks in their annual financial statements and reports. Thus, the climate change risk assessment results should be integrated into financial reports, including the annual financial disclosures and statements. This ensures that stakeholders have a deep understanding of how these risks may affect the business’s performance from the financial aspect (
Aksar et al. 2022;
Iriyadi and Antonio 2021). Based on that, once climate change risks are identified, businesses should evaluate their potential implications. This involves assessing the costs related to it, including damage to fixed assets, increased cost of insurance, litigation, and supply chain (
Biddle et al. 2009;
Lee 2016).
2.3. Governance and Strategy
Companies are encouraged to disclose information about their governance, and how climate change-associated issues are integrated into their overall business strategy. This includes details about board oversight, policies, and decision-making processes related to climate change. Furthermore, risk disclosure should show any climate-related targets, objectives, or commitments the business has established, such as energy efficiency, carbon reduction, or sustainability (
Li et al. 2022;
Lim et al. 2018;
Yunus et al. 2016).
2.4. Adaptation, Resilience Measures and Sensitivity Analysis
Data and information about efforts to adapt to the physical impacts of climate change and enhance its resilience, such as infrastructure improvements or supply chain adjustments. In addition, sensitivity analysis involves evaluating how changes in key variables or assumptions, such as carbon prices, affect a company’s financial valuations and projections. It helps identify which climate-associated elements have the most significant impact on the company (
Attenborough 2022;
Dawkins and Fraas 2011).
2.5. Disclosure Frameworks
Many reporting frameworks have been developed, such as “Task Force on Climate-related Financial Disclosures-TCFD” to guide managers and accountants in preparing and disclosing climate-associated information effectively. Moreover, climate change disclosure is becoming increasingly important in the business world as environmental sustainability and climate risk management gain prominence. Regulatory bodies in different countries are also pushing for more standardized and comprehensive climate change reporting to ensure that all stakeholder categories have the appropriate information to make decisions (
Ananzeh 2022;
Grewal et al. 2019;
Meng et al. 2014).
Moving deeply forward in accounting literature, sustainability disclosure in the past decade has attracted the attention of international and official bodies that working towards a green economy (
Abdullah et al. 2015;
Amanati and Arifa 2022;
Athanasakou et al. 2023;
Hassan 2021,
2023;
Li et al. 2022). These bodies have developed several frameworks, such as the Global Reporting Initiative, the International Integrated Reporting Council, the Sustainability Accounting Standards Board, and the Carbon Disclosure Project. These frameworks provide businesses with clear guidance on non-financial disclosure like environmental disclosure and corporate social responsibility disclosure (
Ellili 2022). Within the sustainability disclosures, climate change disclosure addresses the risks and opportunities related to climate change issues that may affect revenues and expenses in the income statement and on assets, liabilities, capital, and financing in the balance sheet. The authors (
Hahn et al. 2015;
TCFD 2018) indicated three theoretical approaches that can be used to explain the motives of environmental disclosure: socio-political, economic, and institutional. Going further, socio-political theories are stakeholders and legitimacy theories, which represent two complementary points of view, as the company works in response to pressures from stakeholders to obtain legitimacy. When companies are unable to act in accordance with certain social values, their survival may be threatened. Therefore, they take certain actions to align with society’s values to mitigate the threat (
Grubnic 2014). In this context, some studies have indicated that environmental disclosure after environmental incidents is considered an act to obtain legitimacy (
Choi and Wang 2009;
Lim et al. 2018). Economic theories include the signal theory, where voluntary carbon disclosure is a signal from a company to regulators that it is taking potential climate risks seriously. Where (
Berthelot and Robert 2011) found that businesses exposed to constraints—especially political ones—provide higher levels of climate change disclosure in their environmental, social, and governance (ESG) reporting, and (
Dawkins and Fraas 2011) found that businesses that control their carbon emissions can create a competitive advantage. The view of institutional theory suggests that companies make decisions about voluntary carbon disclosure not only according to economic models but also because they are monitored by the institutional context. In addition to these theories, (
Maxwell et al. 2000) indicated the economic theory of regulation, where companies will preemptively act in the face of a regulatory threat. If regulatory risks become a priority, while the marginal cost of self-regulation is relatively low, firms will be socially responsible. In this context, the company’s orientation towards protecting the environment refers to its commitment to operating and making decisions in accordance with the expected future legislation in the absence of binding industrial standards (
Decker 2003), which can apply to actions related to climate change issues.
3. Business Strategy and Climate Change Disclosure
Previous studies argue that business strategy is an important element in defining corporate identity (
Athanasakou et al. 2023;
Hambrick 1983), and business characteristics like management models, values, and resource utilization are related to business strategy (
Zhang et al. 2023). The strategy is stable over time, as it can be modified over more than the possibility of changing it (
Amanati and Arifa 2022;
Bentley-Goode et al. 2019) because the strategy includes a massive amount of detail and interactions between those details to make a change in the strategy are more complex than what is required to retain them (
Hsu et al. 2013). Therefore, it is likely that the business strategy is considered one of the basic determinants of the company’s practices, such as disclosure practices (
Hassan 2023).
There are different theoretical insights that can be used to clarify the relationship between business strategy and climate change disclosure. Authors (
Li et al. 2022;
Weber and Müßig 2022) indicated that the relationship between disclosure and strategy can be understood through the viewpoint of political cost theory, where the companies that are seen as having high profits and significantly growing (characteristic of entrepreneurial companies) attract the attention of outside stakeholders (regulators and public opinion), which lead to bearing additional loads (
Hassan 2023). Thus, companies need to deal with the views of external parties through public relations or social work, and this may also take place by adopting a disclosure strategy that improves the external parties’ views regarding the company (
Hassan 2021). In this context, it can be suggested that due to the growing importance of climate change issues, the companies face increasing pressure that could represent a motive to expand the disclosure of climate change information to mitigate pressures. According to legitimacy theory, risk communication assists stakeholders in assessing potential litigation and reputational risks (
Weber and Müßig 2022). To avoid negative reactions in the future, prospectors signal their legitimacy by promptly disclosing their negative information and related risks (
Oliveira et al. 2013).
The prospectors’ business environment is characterized by high risk levels due to the focus on research and innovation activities, which are usually risky activities (
Lim et al. 2018) and are subject to greater uncertainty (
Bentley-Goode et al. 2019). The high level of risk indicates information asymmetry (
Deumes and Knechel 2008), and according to agency theory, disclosure about risk issues in the annual financial report can increase information asymmetry and agency costs between a company’s managers and shareholders (
Saragih et al. 2021). According to organizational theory, prospectors reveal more information (
Bentley-Goode et al. 2019), which can be the case of climate change disclosure, given its semi-voluntary or semi-mandatory nature. According to ownership cost theory, companies face a trade-off between the benefits and costs of reporting risk information (
Abdullah et al. 2015). Moreover, disclosing excessive information about potential risks may create an impression of inadequate risk management practices. Furthermore, revealing sensitive information could inadvertently benefit competitors. Given their reliance on external financing, prospectors have a heightened need for transparency to maintain investor confidence and attract additional funding (
Weber and Müßig 2022).
4. CEO Overconfidence and Climate Change Disclosure
The CEO is the main driver of the company’s operations and relationships, and he is the most influential person on performance, (
Chen et al. 2017) indicated that CEOs have the right to speak in the major decisions and they can determine the main operations and activities, such as financing and investment (
He et al. 2021). Moreover, one of the decisions of the CEO’s authority is carbon information disclosure. CEO characteristics can affect his decisions, and the most significant psychological deviation in behavioral finance is managerial overconfidence (
Nkukpornu et al. 2020). Overconfident CEOs overestimate the total amount of potential company’s resources, and their ability to deal with the problem. Also, the overconfident CEO believes that he can control the company’s development, so when making decisions, he tends to adopt riskier and biased methods, and the risk level for his company will be higher (
Abdullah et al. 2015). When making carbon disclosure decisions, managers will weigh risks against benefits, and overconfident managers have a higher willingness to take risks, which will decrease their companies’ willingness to disclose carbon data to a certain extent (
Tang and Luo 2014), while non-overconfident managers often reveal more carbon data because of risk aversion. An overconfident CEO tends to underestimate stakeholders’ ability to provide resources and thus neglects the mutual benefits with those parties through climate change data (
He et al. 2021). An overconfident CEO ignores corrective feedback. Thus, the CEO’s overconfidence supports the culture of dictatorship in the company (
Ahmed 2023), and the dictatorship culture makes the company less able to adapt to the changing environment. According to previous perceptions it can be expected that CEO overconfidence negatively affects the level of voluntary climate change disclosure.