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Article

Climate Change Risks Disclosure: Do Business Strategy and Management Characteristics Matter?

by
Mahfod M. Aldoseri
1 and
Maged M. Albaz
2,3,*
1
Department of Finance, College of Business Administration, Prince Sattam bin Abdulaziz University, Al-Kharj 11942, Saudi Arabia
2
Department of Business Administration, College of Business Administration, Majmaah University, Al-Majmaah 11952, Saudi Arabia
3
Accounting and Auditing Department, Faculty of Commerce, Suez Canal University, Ismailia 41522, Egypt
*
Author to whom correspondence should be addressed.
Int. J. Financial Stud. 2023, 11(4), 150; https://doi.org/10.3390/ijfs11040150
Submission received: 2 November 2023 / Revised: 29 November 2023 / Accepted: 8 December 2023 / Published: 14 December 2023
Review Reports Versions Notes

Abstract

:
This research aims to broaden the understanding of the determinants of climate change disclosure, where the study analyzes the impact of corporate business strategy and Chief Executive Officer (CEO) overconfidence on the level of climate change disclosure. The study followed a mixed-methods approach that combines quantitative and qualitative techniques to comprehensively examine the relationships used by the content analysis method to analyze the annual reports of a sample of Saudi companies for the period from 2019 to 2022 to measure the level of disclosure of practices related to climate change. The results of the study show that the companies that tend to adopt the initiative strategy provide more information about climate change than the defending companies do, while the CEO’s overconfidence does not affect the level of climate change disclosure. The results of the study indicate that the nature of the strategic direction adopted by the company is more important in determining the motives for disclosing climate change information than the personal characteristics of management.

1. Introduction

Climate change is widely seen as a main source of physical, social, and economic risks at the global community level, and it affects the business environment directly or indirectly (Eleftheriadis and Anagnostopoulou 2015). Directly, economic sectors, such as forestry, agriculture, and tourism, are particularly vulnerable to the direct physical impacts of climate change because of their dependence on the environment, and thus face increased risks (Lash and Wellington 2007). Indirectly, energy-intensive sectors such as power production, cement, and aluminum are more vulnerable to risks associated with current or imminent legislation to reduce greenhouse gas emissions. Due to the growing interest and increasing risks, disclosure about climate change issues become of great importance. Kim et al. (2022) and Newman et al. (2023) argued that disclosure of climate change risks is associated with a significant increase in strengths related to climate change and a significant decrease in concerns related to it, indicating that this disclosure is reflected in the companies’ operations that help address climate change. Therefore, academic studies should seek to build a more in-depth understanding of the determinants behind companies’ tendency to voluntarily provide such disclosure.
Moreover, global concern about climate change has been embodied since the 1990s, beginning with the formulation of the United Nations Framework Convention on Climate Change at the Earth Summit in 1992. However, the main impetus for the development and adoption of climate change mitigation policies is the establishment of the Kyoto Protocol, which entered into force in 2005, and represents a legally binding agreement to reduce emissions in industrialized countries (Maamoun 2019). To achieve the goals of the Kyoto Protocol, national and international policies have been adopted to mitigate the effects of climate change, including the imposition of a cost of carbon emissions in the form of carbon taxes. Therefore, the climate change risks are not limited to the physical risks facing the planet but also represent substantial risks for companies, investors, and the financial system (Attenborough 2022). These increasing risks have attracted the attention of stakeholders, such as government agencies, institutional investors, accounting organizations, banks, consumers, and nonprofit organizations who have required information related to corporate climate change practices (Maamoun 2019). Companies play an essential role in controlling climate change risks by reducing greenhouse gas emissions (Tang and Luo 2014), and they should provide information related to environmental and carbon performance (Meng et al. 2014), where one aspect of adaptation to climate change is the disclosure of climate change information (Attenborough 2022).
Furthermore, companies show carbon emissions data and demonstrate low-carbon behaviors through climate change disclosure (He et al. 2021) to create a positive image of the company regarding climate change issues (Peng and Li 2022). Recent years have seen a growing interest in climate change disclosure globally, due to the support of the Climate Financial Disclosure Working Group (TCFD), the Sustainability Accounting Standards Board, the Carbon Disclosure Project, and the Securities and Exchanges Commission (SEC) (Iriyadi and Antonio 2021). Disclosure of greenhouse gases and carbon is the newest area of environmental disclosure, and investors consider climate change disclosure as crucial as traditional disclosure (Ilhan et al. 2019). Due to the development of big data technologies, climate change disclosure has become more efficient and less costly, prompting more companies to provide climate change information. Therefore, understanding the determinants behind that disclosure can provide information of high importance to the business environment. Among the possible determinants is the nature of the company’s strategic direction, which is expected to determine the company’s practices, including disclosure practices (Frank et al. 2019; Hilary et al. 2016), as well as management characteristics that can significantly interfere in determining the company’s disclosure practices.
The strategic direction is a major and important factor in formulating the company’s directions, including those related to the various aspects of disclosure, where business strategy can affect the financial reporting process and voluntary disclosure (Bentley-Goode et al. 2019), and it is also one of the determinants of the complexity of the annual reports (Lim et al. 2018). Therefore, it can be argued that the strategic direction affects the company’s disclosure strategy, including the extent of providing climate change information. Companies may adopt different business strategies, and those strategies can be classified depending on their basic point of view into two main types, which are the initiative strategy that largely follows new opportunities and the defense strategy that depends on exploiting existing strengths (Hsieh et al. 2019). Moreover, (Bentley-Goode et al. 2019) indicated that prospector companies are more likely to provide voluntary disclosure, therefore it can be suggested that prospector companies adopt a more open disclosure strategy, making them more inclined to provide climate change information. Prospector companies are characterized by a greater degree of uncertainty and risk in their business environment, so they largely need to expand their disclosure, including disclosure of the climate change risks, which helps mitigate agency costs and information asymmetry. In addition, prospector companies have greater public opinion exposure; therefore, climate change disclosure can limit future negative reactions, as risk disclosure and providing negative information helps them to gain legitimacy (Oliveira et al. 2013). In addition, the prospector companies heavily rely on external funding, therefore they prefer to expand disclosure to show transparency to all stakeholders.
The CEO is considered the person with the greatest influence and who plays the most important role within the company’s management (Zhang et al. 2023), and his position gives him the ability to control the formulation of the disclosure strategy. Therefore, it can be expected that there is an integration between the CEO characteristics and the disclosure characteristics. While traditional finance theories indicate that managers make rational decisions, behavioral finance theories indicate that they do not always rationally act and that there are various biases that affect managerial decisions (Attenborough 2022). Overconfidence is considered one of the most important aspects of bias affecting managerial decisions, as overconfidence refers to the tendency of managers to overestimate their abilities, and, therefore, they overestimate the future returns of the company’s investments and underestimate the risks to which it is exposed. In this context, CEO overconfidence can affect disclosure behavior, where overconfident managers prefer to publish optimistic earnings forecasts (Hribar and Yang 2016) and tend to manage investors’ views by keeping bad news. In addition, due to the tendency to ignore internal control importance over financial reporting, over-confident directors will have a negative impact on investment in infrastructure and effective information systems of financial reporting (He et al. 2021), where (Lee 2016) found that CEO overconfidence negatively affects the company’s investment to implement effective financial reporting information system and result in making financial information less reliable. Although overconfidence is an important psychological characteristic of CEOs, its effect on corporate environmental disclosure receives little attention (Hassan 2023). In this context, the current study addresses the effect of overconfidence on climate change disclosure.
According to the foregoing, the current study investigates the impact of both the business strategy and managerial overconfidence on climate change disclosure to increase the understanding of why businesses tend to disclose such information. To achieve this objective, the study uses data from the Saudi business environment, which represents a suitable environment for the applied study.
Thus, the article continues as follows: part two reviews accounting literature, focusing on climate change disclosure determinants, business strategy, and management characteristics, then hypotheses development. Part three develops the research model, part four Results, part five Discussion, and part six Conclusion.

2. Literature and Hypotheses

2.1. 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:

2.1.1. 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).

2.1.2. 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).

2.1.3. 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).

2.1.4. 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).

2.1.5. 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.

2.2. 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).
According to previous theoretical perspectives, it can be expected that the type of business strategy can affect the level of voluntary climate change disclosure, where prospector companies seem to provide more disclosure than defender companies. Therefore, the following hypothesis can be examined.
Hypothesis 1:
prospector companies provide more climate change risk disclosure.

2.3. 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. Therefore, the following hypothesis can be examined.
Hypothesis 2:
there is a negative association between CEO overconfidence and climate change risk disclosure.

3. Methodology

3.1. The Study Sample

The study population is represented by all non-financial listed Saudi companies during the period from (2019) to (2022), where the number of these companies is (177) distributed over nineteen sectors. The researchers selected the sample according to several criteria, including (a) the availability of the company’s financial reports in a regular way, and the availability of sufficient data to calculate the variables of the study; (b) the company has not been subject to delisting, merger, or discontinuation; (c) the company has been registered for more than five years; (d) the company has not made regularly losses for more than a year. Going further, the adoption of the previous criteria resulted in the selection of (102) companies to represent the sample, equivalent to (58%) of the total number of non-financial listed companies, and the sample was distributed across all sectors. Therefore, the study sample includes a total of 408 firm-year observations.

3.2. Variables Measurement

3.2.1. Climate Change Disclosure

Authors (Haque and Deegan 2010) provided a climate change disclosure index based on several reports related to the environment and climate, and it consists of 25 elements of climate change disclosure. The index was used in the study of (Eleftheriadis and Anagnostopoulou 2015). The content analysis method is used to analyze the companies’ annual reports to quantitatively express the disclosure, as the disclosure level for each company is represented by the ratio of the disclosed elements in the report to the total elements of the disclosure index that are appropriate to the nature of each company, where the elements that are not appropriate to the nature of each company are excluded.

3.2.2. Corporate Business Strategy

The approach of (Bentley-Goode et al. 2019; Hsieh et al. 2019) is used, where a compound measure of six factors that are measured as an average of the previous 5 years. The factors are the average number of company’s employees to sales, the standard deviation of the number of employees, the percentage of research and development expenditures to sales, the rate of change in sales for one year, the percentage of marketing and administrative expenses to sales, plant, and equipment (PPE) to total assets, the average of the net properties. These measures are ranked into quintiles, where observations in the highest (lowest) quintile receive a score of five (one). Thus, the company’s strategy is measured as the sum of the six scores, so that the strategy index ranges between six and thirty. Higher scores represent a prospector strategy, and lower scores represent a defender strategy (Hassan 2021).

3.2.3. CEO Overconfidence

The measurement of CEO overconfidence depends on an aggregate variable for two measures. First, (Malmendier and Tate 2005) defined overconfidence as a manager’s tendency to incrementally purchase his company’s shares, so, CEO overconfidence is measured as a dummy variable equal to 1 if the manager purchased his company’s shares during the year and 0 otherwise. Second, (Schrand and Zechman 2012) refer to overconfidence as the impractical expectation about performance outcomes, so, CEO overconfidence is measured as a dummy variable equal to 1 if the actual EPS is less than the estimated rate and 0 otherwise. Accordingly, an indicator that ranges between 0 and 2 can be formed to measure the CEO overconfidence based on the combination of the two previous dummy variables.

3.3. Study Model

To test the study hypotheses, the linear regression model using the panel data method will be used, where the study model takes the following form:
CCDS = β0 + β1 STRATEGY + β2 OVCONF + ∑ β3-8 control variables
where the dependent variable is the climate change disclosure CCDS, and the independent variables are the type of business strategy and the degree of CEO overconfidence OVCONF. The control variables represent a group of control variables, which are as follows:
  • CS is the firm size as measured by the natural logarithm of total assets.
  • ROA is the return on assets.
  • LEV is the leverage ratio as measured by total debt to total equity.
  • Age is the age of the company.
  • BIG4 is a dummy variable that takes the value (1) if the company is being audited by one of the big4 audit firms and the value (0) otherwise.
  • CG is the level of governance, which is an indicator that takes the value from 0 to 4 based on accumulating points for the company according to the following: there is one person holding the positions of CEO and Chairman of the Board of Directors (0) or not (1), the board of directors includes women representation (1) or not (0), there is a committee for environmental matters at the level of the board of directors (1) or not (0), more than half of the members of the Board of Directors are independent directors (1) or not (0).

4. Results

4.1. Descriptive Statistics

Table 1 presents the results of the descriptive statistics, where the results show the low level of climate change disclosure in Saudi companies, as the average disclosure rate during the study period is approximately 36%. Despite the low disclosure level, Table 2 shows a gradual growth in the level of climate change disclosure of the Saudi companies during the years of the study, which indicates that the companies’ interest in climate change disclosure is constantly increasing. This increasing level of disclosure during the years is consistent with the growing interest at the global level in climate change issues, which in turn was reflected in the increasing demands of companies to provide information about climate change activities. The results indicate that the level of disclosure in the Saudi business environment reached 47% in 2022, the year in which Saudi organized the International Climate Summit, which was accompanied by great interest in climate change at various levels and unprecedented media interest in these issues. However, that level of disclosure (which represents almost half) is considered low and does not agree with the amount of attention that climate change has received in Saudi society, in general, and particularly Saudi business environment.
The results show that the average strategic orientation index of the company is approximately 17, which indicates that the prevailing strategic orientation in the Saudi business environment is toward the defense strategy. To clarify this result, companies can be classified according to the strategic indicator, where companies with an indicator of 18 or less reflect the defense strategy, while companies with an indicator of more than 18 express the prospector strategy. According to this classification, the number of observations that represent the prospector strategy is 169 (41.4%), and the number of views representing the defense strategy is 239 views (58.6%), which proves that most companies in the Saudi business environment tend to adopt a defensive strategic orientation. Table 2 indicates a significant convergence in the average strategy index during the different years of study, which is consistent with the point of view of the stability of the strategic orientation over time. Regarding CEO overconfidence, the results show a low level of confidence in the CEO, as the average overconfidence index is approximately 0.72. Table No. 2 indicates a significant convergence in the average overconfidence index during the study years, with a noticeable increase in the overconfidence index in 2022 after the end of the Corona pandemic worldwide.

4.2. Correlation Analysis

To clarify the univariate correlations between the variables, Table 3 shows the correlation test. The correlation results are consistent with the general framework of the study hypotheses, as the results show that there is a significant positive correlation between the business strategy and the climate change disclosure, which indicates that the companies that adopt the initiative strategy tend more to provide information about climate change. The results also show a significant weak negative correlation between CEO overconfidence and disclosure, which reflects that the increasing level of CEO overconfidence led to a decrease in the level of climate change disclosure. The results also show a significant negative correlation between the CEO’s overconfidence and the strategy index, reflecting that companies with an overconfident CEO tend to adopt the initiative’s business strategy.

4.3. Hypotheses Test

To test the hypotheses of the study, the following linear regression model is used using the panel data method.
CCDS = β0 + β1 STRATEGY + β2 OVCONF + β3 CS + β04 ROA
+ β5 LEV + β6 AGE + β7 BIG4 + β8 CG
Table 4 presents the regression results, which show a significant positive association between the type of strategic direction and the level of climate change disclosure, indicating that the companies that tend to adopt the initiative strategy provide more information about climate change, which leads to accepting the first hypothesis of the study. This result supports the point of view concerning the importance of the company’s business strategy to determine the company’s practices, including disclosure practices. This result is considered practical evidence that supports the views on the impact of business strategy on disclosure, where the type of business strategy contributes to determining the level of public attention of the company, which in turn affects the company’s level of disclosure according to the political cost theory. The result presents evidence that the prospector companies attract more public attention and thus tend to voluntarily provide more information to positively address those public concerns. In this context, the result indicates that climate change information is of importance at the public level and can be used to address public concerns. The result also supports the point of view that the initiative’s strategic direction increases the uncertainty and information asymmetry in the company’s business environment, which can be addressed by increasing the disclosure level according to the agency theory, as disclosure reduces information asymmetry. In this context, the result indicates the importance of climate change information for the company’s business environment, as it can contribute to mitigating uncertainty and information asymmetry.
The results show that there is no significant relationship between the CEO’s overconfidence and the level of disclosure, indicating that the CEO’s overconfidence does not affect the company’s disclosure of climate change information, which leads to the rejection of the second hypothesis. This result is not consistent with the view of behavioral finance theories that the CEO’s personal characteristics will influence his decisions and thus the company’s practices. This result indicates the weak impact of management features on the company’s practices in times of crisis and instability, as the period of study represents a period of instability in the business environment at the global level and at the Saudi level. The overconfident CEO tends to take risks and reduce the ability of stakeholders to provide resources, but the need for external financing in times of crisis outweighs that CEO’s tendency. In this context, the results of hypotheses testing show that the type of the company’s business strategy is more important and influential in formulating the company’s practices than the management characteristics, particularly in times of instability.

4.4. Sensitivity Analysis

Sensitivity analysis includes analyzing the effect of change in some variables on the results, and sensitivity analysis includes two points (Hassan 2021). First: Measuring the business strategy variable as a dummy variable that takes (1) if the sum of the strategy indicator of the company is greater than (18) and takes the value of 0 if the sum of the indicator is 18 or less and using that dummy variable instead of the strategy variable in the regression model. The regression results (not tabulated) indicated that there is also a positive association between the business strategy and the climate change disclosure (Coef. 0.3910319), which supports and increases confidence in the results of the study. Second: Using an interactive variable that expresses the interaction between the business strategy and the degree of CEO overconfidence in the regression model to measure the effect of the interaction between the strategy and overconfidence on the level of disclosure. The regression results (not tabulated) indicated that there is also a positive relation between the interactive variable and climate change disclosure (Coef. 0.2110913), indicating that companies that adopt an initiative strategy and have an overconfident CEO provide a higher climate change disclosure level. This result confirms what was indicated by the results of hypothesis tests that the type of business strategy is more important and more influential on the disclosure level in times of crisis.

5. Discussion

Climate change has emerged—in academic research—as a pressing global phenomenon, prompting companies to reevaluate their operations and strategies to mitigate their social and environmental impact and adapt to the current climate change. Climate change risk disclosure in financial reporting, in addition to the process of publicly sharing information about a company’s risks and opportunities associated with climate change, has gained traction as a mechanism for enhancing financial transparency, legitimacy, and accountability. This study deals with the complex relationship between climate change risk disclosure, business strategy, and management characteristics.
The main findings of our study ensure that business strategy plays a major role in adopting climate change risk disclosure practices in financial reporting. Companies adopting dynamic business strategies, characterized by sustainability initiatives, innovation, and market expansion tend to apply more comprehensive climate change disclosures compared to those applying defensive strategies. This suggests that companies with a forward-thinking approach are more inclined to proactively manage and disclose climate change-associated risks, recognizing the future gains and benefits for their investor confidence, reputation, and long-term success. This result is consistent with some previous studies such as (Hilary et al. 2016; Tang et al. 2018).
The study’s findings also provided evidence about the impact of management characteristics on climate change risk disclosure in financial reporting. Furthermore, CEO overconfidence, measured by the degree to which CEOs perceive themselves to be more able than their peers, does not demonstrate a significant relation with climate change disclosure level. This suggests that individual managerial attributes may not be as controlling as the overall business strategy of the firm in determining disclosure practices in preparing the financial reporting. This result is consistent with some previous studies such as (Alashi and Badi 2020; Radu and Smaili 2022).
The implications of our study extend beyond theoretical contributions to illustrate insights for both companies, standards setters, and policymakers. For companies, the findings ensure the importance of aligning climate change risk disclosure practices with their trends in adopting a specific business strategy. Companies adopting proactive strategies should apply disclosure as a main tool to signal their commitment to sustainability and attract investors. Conversely, companies employing defensive strategies may need to reevaluate their disclosure practices to improve transparency and manage stakeholder expectations.
Standards setters and policymakers can also draw upon our findings to inform regulatory frameworks, promote effective climate change risk disclosure practices in financial reporting, and encourage companies to apply proactive business strategies. Additionally, merging CEO overconfidence into risk evaluation models may illustrate further insights into corporate decision-making and its implications for climate change disclosure in financial reporting.
Our study illustrated the major role of business strategy and management characteristics in adopting climate change risk disclosure practices in financial reporting. Proactive business strategies and a corporate culture that is worth sustainability encourage comprehensive climate change disclosures and develop transparency and accountability. As climate change continues to create significant opportunities and risks, companies, standards setters, and policymakers should work together to develop disclosure practices and ensure informed decision-making.

6. Conclusions

The study aimed to analyze the climate change disclosure determinants in the Saudi business environment to increase the available understanding of companies’ motives for disclosing information about the practices related to climate change. The study examined the effect of the company’s business strategy and the CEO’s overconfidence on the level of disclosure in Saudi companies. The analysis of the study data showed a low level of climate change disclosure in Saudi companies, and that these companies tend to adopt a defense strategy with a low level of CEO overconfidence. The study provided practical evidence that the type of the company’s business strategy greatly affects the company’s tendency to provide information about climate change, as companies that adopt an initiative strategy tend to provide that information more than companies that tend to adopt a defense strategy. Contrarily, the results showed that the CEO’s overconfidence does not affect the company’s tendency to provide information about climate change. These results indicate that the nature of the business strategy adopted by the company plays a more important role in the company’s disclosure practices than the management’s personal characteristics in times of market instability. In addition, the results were drawn through application to the Saudi environment and may be changed because of changes in the application environment or influenced by external factors, such as changes in government regulations or major economic changes in the future.
Going further, we developed some potential future research directions for scientific research. (a) Investigating the impact of different business strategy dimensions on climate change risk disclosure in financial reporting, meaning, exploring the nuances of how specific dimensions of business strategy, such as market orientation, innovation, and sustainability focus, influence the content and level of climate change risk disclosure in annual reports. (b) Examine the role of industry characteristics in moderating the relationship between climate change risk disclosure and business strategy, meaning, analyze how industry-specific elements, such as stakeholder expectations and regulatory pressures, affect the extent to which companies apply business strategies and engage in climate change disclosures. (c) Evaluate the influence of CEO characteristics beyond under or overconfidence on climate change risk disclosure, meaning, illustrate the impact of CEO characteristics, such as environmental awareness and risk aversion on climate change disclosure practices.

Author Contributions

Conceptualization, M.M.A. (Mahfod M. Aldoseri) and M.M.A. (Maged M. Albaz); methodology, M.M.A. (Maged M. Albaz); software, M.M.A. (Mahfod M. Aldoseri); validation, M.M.A. (Maged M. Albaz); formal analysis, M.M.A. (Maged M. Albaz); investigation, M.M.A. (Mahfod M. Aldoseri) and M.M.A. (Maged M. Albaz); resources, M.M.A. (Mahfod M. Aldoseri) and M.M.A. (Maged M. Albaz); data curation, M.M.A. (Mahfod M. Aldoseri) and M.M.A. (Maged M. Albaz); writing—original draft preparation, M.M.A. (Mahfod M. Aldoseri); writing—review and editing, M.M.A. (Maged M. Albaz); visualization, M.M.A. (Maged M. Albaz); supervision, M.M.A. (Mahfod M. Aldoseri). All authors have read and agreed to the published version of the manuscript.

Funding

This research received no external funding.

Data Availability Statement

Date and information are available on request.

Conflicts of Interest

The authors declare no conflict of interest.

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Table 1. Descriptive statistics.
Table 1. Descriptive statistics.
VariablesObs.MeanStd. Dev.MinMax
CCDS4080.36130150.14553030.1230.654
STRATEGY40817.031864.054477826
OVCONF4080.71813730.806280302
CS40810.798411.7512663.1413.85
ROA4080.29823160.0987943−0.1320.495
LEV4084.8816181.7972212.119.74
AGE4081.3367650.14009941.11.9
BIG44080.46689040.499512601
CG4082.524511.06283514
Table 2. Descriptive statistics during years.
Table 2. Descriptive statistics during years.
VariablesObs.2019202020212022
MeanStd. Dev.MeanStd. Dev.MeanStd. Dev.MeanStd. Dev.
CCDS1020.2450190.0904400.3135580.0979810.4130880.1274190.47353920.1412162
STRATEGY10216.980393.73365816.74513.85809216.441184.37719916.960784.242458
OVCONF1020.6960780.8057860.6568620.77708640.67647060.78553460.84313730.8530098
CS1028.7841181.25624410.246081.02590711.425780.854114612.737660.630587
ROA1020.19014710.07251230.26882350.05613080.33483330.05471490.39912250.0602053
LEV1027.1264711.043185.4634310.86808374.1433330.67161742.7932350.5805019
AGE1021.1872550.08521561.2872550.08521561.3882350.08593591.4843140.0864539
BIG41020.43762380.42775030.43762380.42775030.49215690.3117140.50015690.421592
CG1021.4117650.55137891.9803920.64455672.8725490.53900473.8333330.3745184
Table 3. Correlation results.
Table 3. Correlation results.
CCDSSTRATEGYOVCONFCSROALEVAGEBIG4CG
CCDS1.0000
STRATEGY0.33334 **1.0000
OVCONF−0.1463 *−0.4085 **1.0000
CS0.4033 **0.5585 **0.1623 **1.0000
ROA0.6925 *0.0437 *0.05320.6116 **1.0000
LEV−0.5169 **−0.0141 *−0.0571−0.7965 *−0.70 *1.0000
AGE0.55170.01520.0659 **0.6333 **0.6452−0.664 **1.0000
BIG40.5424 *0.0256 *0.0109 **0.6876 **0.6540−0.731 **0.64691.0000
CG0.4999 **0.0337 **0.0497 *0.7261 **0.6630−0.7882 *0.6787 *0.6880 *1.0000
** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
Table 4. Regression results.
Table 4. Regression results.
Random Effects GLS Regression
CCDSCoef.Std. Err.zp > |z|[95% Conf. Interval]
STRATEGY0.50029160.80125172.230.016−0.00216181.002745
OVCONF0.00351840.00629460.560.576−0.00881870.0158555
CS−0.01471890.005217−2.820.005−0.0249439−0.0044938
ROA0.83127530.078732610.560.0000.67696220.9855884
LEV−0.00450050.005926−0.760.448−0.01611520.0071142
AGE0.19290480.05487413.520.0000.08535360.3004559
BIG40.05102410.01645553.100.0020.01877190.0832763
CG0.00622910.00888090.700.483−0.01117720.0236353
Cons0.07336310.10165942.720.001−0.12588560.2726118
R-sq:Within = 0.2529
Between = 0.9973
Overall = 0.5276
Wald chi2(8)441.22
Prob > chi20.0000
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Aldoseri, M.M.; Albaz, M.M. Climate Change Risks Disclosure: Do Business Strategy and Management Characteristics Matter? Int. J. Financial Stud. 2023, 11, 150. https://doi.org/10.3390/ijfs11040150

AMA Style

Aldoseri MM, Albaz MM. Climate Change Risks Disclosure: Do Business Strategy and Management Characteristics Matter? International Journal of Financial Studies. 2023; 11(4):150. https://doi.org/10.3390/ijfs11040150

Chicago/Turabian Style

Aldoseri, Mahfod M., and Maged M. Albaz. 2023. "Climate Change Risks Disclosure: Do Business Strategy and Management Characteristics Matter?" International Journal of Financial Studies 11, no. 4: 150. https://doi.org/10.3390/ijfs11040150

APA Style

Aldoseri, M. M., & Albaz, M. M. (2023). Climate Change Risks Disclosure: Do Business Strategy and Management Characteristics Matter? International Journal of Financial Studies, 11(4), 150. https://doi.org/10.3390/ijfs11040150

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