Climate Risk Disclosure, Green Finance, and Cost of Capital Among PSX Non-Financial Firms

ABSTRACT: Purpose: The purpose of this study is to examine correlations between climate risk disclosure quality (CRDI), green finance (GFI), and cost of capital (COC) among Pakistan Stock Exchange (PSX)-based non-financial companies for 2013-2023. The study is based on Information Asymmetry Theory, Stakeholder Theory and Legitimacy Theory to investigate whether superior climate risk disclosure leads to lower cost of equity, debt and WACC; whether green finance acts as a mediator in the context of the aforementioned relationship; and whether board environmental expertise acts as a moderator in the mediated pathway. Design/Methodology/Approach: An unbalanced panel of 165 PSX-listed non-financial firms (maximum 1,815 firm-year observations) is analyzed. The Climate Risk Disclosure Index (CRDI) is a 24-item index based on structured content analysis (dual-coder, Cohen's Kappa = 0.83), which can be disaggregated to include the categories of transition risk disclosure (TRD), physical risk disclosure (PRD), and governance climate accountability (GCA). Cost of equity is calculated by using CAPM, cost of debt by using the interest expense ratio and WACC by using the market-value weighting. Green finance is expressed in a PCA-weighted combination of four instruments. Endogeneity is controlled for using System GMM (Blundell and Bond, 1998). Estimation of mediation (PROCESS Model 4) and moderated mediation (PROCESS Model 14) involves the use of BCa bootstrapped confidence intervals (5000 iterations). Findings: CRDI is negatively and significantly associated with cost of equity (beta = -0.187, p < 0.001), cost of debt (beta = -0.142, p < 0.001), and WACC (beta = -0.168, p < 0.001). The CRDI-cost of equity relationship is partially mediated by green finance (indirect effect = -0.072; BCa 95% CI [-0.118, -0.031]), accounting for nearly 38.5% of the total. Highly-efficient boards (IMM = -0.024; BCa 95% CI [-0.041, -0.009]) provide significant moderation of this mediated pathway, reducing costs by 2.1x more. Other disclosure variables, including transition risk disclosure (beta = -0.214), have higher effects on capital costs than do physical risk disclosure (beta = -0.156). All results are robust to GMM endogeneity correction. Research Limitations: Single-country PSX setting; GRI content-analysis-based CRDI is based on self-disclosed reports; limited data availability on green finance after 2023 for SECP-mandatory PE disclosures; and availability of data for the era before SECP-mandatory PE disclosures is limited. Practical Implications: Ensure that SECP require TCFD related disclosures by PSX companies. To incentivize green finance cost reduction, environmental expertise investment is needed in boards. SBP Sustainable Finance Framework certification is a capital cost optimizing strategy outside of regulation. Originality/Value: It is the first study which provide the TCFD-aligned CRDI for PSX non-financial firms disaggregating TRD, PRD, and GCA; (2) it is the first study to find evidence of CRDI-COC through the mediation of green finance; (3) it is the first study to test Board EE as a moderator; and (4) it is the most comprehensive PSX decade panel climate disclosure and capital costs with System GMM correction. Keywords: climate risk disclosure; green finance; cost of capital; TCFD; board environmental expertise; PSX; WACC; information asymmetry; System GMM; emerging markets