Carbon risk, accounting conservatism and the moderating role of financial materiality adoption: international evidence

Purpose This paper aims to investigate the direct effect of carbon risk on conditional accounting conservatism and examine the moderating role of the adoption of the financial materiality (FM) principle. Design/methodology/approach This study conducts multivariate regression analysis on a panel of 315 firms from high-emission sectors across 17 countries (2020–2024), drawing on the Refinitiv Eikon and Bloomberg databases. Findings The results indicate that carbon risk has a negative effect on conditional conservatism. FM further amplifies this negative relationship. As this reporting principle is intended to enhance transparency and promote the timely recognition of carbon risk, the finding may be consistent with its symbolic implementation. Robustness checks show that external assurance of environmental disclosures neither mitigates this delayed recognition nor attenuates the amplifying effect of FM. The findings remain robust under alternative measures and after addressing potential endogeneity concerns. Originality/value This study offers post-2020 evidence on the relationship between carbon risk and conditional conservatism, addressing a literature that remains limited, mixed and largely rooted in earlier regulatory contexts. Moreover, whereas prior research has primarily examined FM’s implications for non-financial disclosure, this study shifts attention to its unintended consequences for accounting prudence. The results offer policy-relevant implications for highly polluting firms, auditors and investors amid the growing salience of corporate carbon risk.