Sustainable Production and Consumption 27 (2021) 1830–1840

Contents lists available at ScienceDirect

Sustainable Production and Consumption

journal homepage: www.elsevier.com/locate/spc

Research article

Ambitious corporate climate action: Impacts of science-based target

and internal carbon pricing on carbon management
reputation-Evidence from Japan
Lopin Kuo∗, Bao-Guang Chang
Tamkang University, Taiwan

a r t i c l e i n f o a b s t r a c t

Article history: Under national climate change countermeasures, some Japanese firms have set science-based targets
Received 1 December 2020 (SBT) for carbon emission to achieve the goal of keeping global warming below 2°C. Some scholars pro-
Revised 20 March 2021
posed that by implementing an internal carbon pricing (ICP) strategy, firms can prepare themselves for
Accepted 23 April 2021
the uncertainties of external carbon pricing in advance. Can Japanese firms effectively utilize these prac-
Available online 28 April 2021
tical carbon management tools (strategies) (i.e., SBT and ICP) to enhance their carbon management rep-
Editor: Prof. Adisa Azapagic utation (CMR)? CMR can be regarded as an important indicator of low-carbon competitiveness in future
international trade. So far, this topic has never been explored. Based on this perspective, this study fo-
Keywords:
Climate change cuses on the period of 2016–2019 after the Paris Agreement went into effect. The full samples consist of
Science-based target 1,994 Japanese firms using ordinal logistic regression. The empirical results indicate that, overall, Japanese
Internal carbon pricing sample firms which set SBT or implemented ICP strategy have better CMR, but the odds ratio (OR) of set-
Carbon management reputation ting SBT is higher than that of ICP on enhancing CMR. Besides, implementation of both SBT and ICP
High carbon emission industry approaches can create a significant complementary or additional effect on the improvement of CMR for
Japan only firms in high carbon emission industries (HCEI). The practical implication of this study is that HCEI’s
managers are advised to adopt both SBT and ICP mitigating climate change risk in an ever-evolving regu-
latory. Further, it is not cost-effective for non-high carbon emission industries (NHCEI) to implement both
SBT and ICP simultaneously. Instead, priority setting SBT will be more appropriate for NHCEI in improving
CMR. How should firms’ managers of different carbon emission attributes effectively utilize SBT and/or
ICP to enhance their CMR in Japan? The aim of this study is to fill related evidences.
© 2021 Institution of Chemical Engineers. Published by Elsevier B.V. All rights reserved.

1. Introduction
In recent years, there has been much discussion about
the importance of carbon risk management (Stubbs and Lock-
wood, 2007; Melnyk et al., 2003; Busch and Hoffmann, 2007;
Subramaniam et al., 2015; Tang and Luo, 2014). Scholars have
suggested that firms should adopt a formal carbon risk manage-
ment system first (Subramaniam et al., 2015) and view climate
risk management as one of the strategic factors of competitiveness
(Busch and Hoffmann, 2007). Besides, disclosing climate change
information to stakeholders is a way to increase the firm’s in-
formational contribution to global warming (Kolk et al., 2008;
Doda et al., 2016). This is because disclosure can strengthen the
support of stakeholders and ensure the legitimacy of the firm’s be-
haviors (Suchman, 1995). Carbon risk is a core issue in environ-
∗
Corresponding author.
E-mail address: lopinkuo@mail.tku.edu.tw (L. Kuo).
mental risk management. When a firm is faced with carbon risk,
it will suffer greater uncertainties of future cash flows, because
the threat of supervisory, physical and commercial risks, no mat-
ter known or currently unidentified, is intensifying (Sharfman and
Fernando, 2008; Bauer and Hann, 2010; Schneider, 2011).
Some studies have linked the relationship between carbon
management reputation (CMR) and corporate characteristic fac-
tors (e.g. size, debt ratio, high carbon emission industries (HCEI)
and profitability). For example, Gonzalez-Gonzalez and Zamora-
Ramírez (2016) found that larger firms receive relatively more
public attention and are thus inclined to disclose more car-
bon management information, with the goal of increasing its
carbon management transparency and maintaining the envi-
ronmental legitimacy of the company. The same argument is
also proposed in several other studies (Al-Tuwaijri et al. 2004;
Stanny and Ely, 2008; Borghei and Leung, 2013; Peng et al., 2014).
Ortas et al. (2014) found that debt ratio is positively related to
agency cost and suggested that firms can lower the agency cost by
disclosing more carbon management information. This argument

https://doi.org/10.1016/j.spc.2021.04.025
2352-5509/© 2021 Institution of Chemical Engineers. Published by Elsevier B.V. All rights reserved.
L. Kuo and B.-G. Chang
is supported by other scholars (Stanny and Ely, 2008; Tang and
Luo, 2011). HCEI may be motivated to disclose carbon emissions
and management information in order to reduce the future com-
pliance cost (Clarkson et al., 2008; Cho et al., 2012; Peng et al.,
2015). Higher profitability means the firm has more funds to cope
with the costs of emissions reduction and carbon management
(Bewley and Li, 20 0 0; Cormier et al., 2004).
The aforementioned researches mainly concerned about corpo-
rate characteristic drivers on enhancing firms’ CMR. However, some
researches have noted that there is an obvious gap between firms’
awareness of carbon risks and the way they have responded to
carbon risks, and the effectiveness of their actions is questionable
(Jones and Levy, 2007; CDP, 2018). How should corporate managers
align corporate carbon reduction targets with global decarboniza-
tion trajectories in improving firms’ CMR? KPMG’s report (2018)
suggested that firms should start to reduce carbon emissions fol-
lowing science-based target (SBT) rather than doing it arbitrarily
and without targets, because SBT can provide firms with a clearly-
defined path to reduce emissions in line with the Paris Agreement
goals.
In addition, companies around the world are taking climate ac-
tion by instituting their own internal price on carbon. An internal
price places a monetary value on greenhouse gas emissions, which
businesses can then factor into investment decisions and business
operations. That is, firms can adopt the method of Internal Carbon
Pricing (ICP), which is to estimate the cost of emitting a metric
ton of carbon dioxide, to reveal the hidden costs of greenhouse
gas pollution. By adopting ICP, firms can prepare themselves for
the uncertainties of the future external carbon price and also en-
able investors to clearly identify their competitiveness level in the
low carbon world (Aldy and Gianfrate, 2019). In short, ICP is a risk
management strategy to improve firms’ CMR (Chang, 2017).
CMR is an important intangible asset for firms in the past,
present and future, because investors are paying more attention
to the risks and opportunities of companies under low-carbon de-
mands. Furthermore, CMR is an important signal for climate fund
managers to make decisions, because corporate reputation as a
key organizational factor or asset (Barnett et al., 2006) responsi-
ble for a firm competitiveness, especially from resource-based view
researchers (Barney, 1991; Hall, 1992). Prior researches have also
found that firms with higher CMR are more likely to benefit from
higher financial returns including market valuation and lower cost
of capital (Clarkson et al., 2008; Luo and Tang, 2014). Therefore, it
is an important research to focus on improving firms’ CMR.
In 2015, Japan declared the country’s target of a “26% reduction
by 2030 and an 80% reduction by 2050 compared to 2013 levels”
as its nationally determined contribution (NDC). Japan as the fifth
largest carbon emitting country has a greater responsibility to re-
duce global carbon emissions, but the analysis shows that Asia’s
top one is Japan on low-carbon economies (Srivastav et al., 2018).
In addition, the survey shows that Japan is the country with the
most climate governance A level companies in Asia (CDP, 2020).
This means that Japanese companies should be worthy of under-
standing their target and strategy of carbon management on im-
proving firms’ CMR.
In a review of related literature, this study found that nu-
merous scholars have made contributions to exploration factors
and financial impacts on improving firms’ CMR, but there still ex-
ist some research gaps to be filled. First, the existing researches
have little focused on how firms’ managers should set low-
carbon target to respond the external stakeholders for the demand
of climate governance (Lim and Greenwood, 2017; Helfaya and
Moussa, 2017; Weinhofer and Hoffmann, 2010; Lamberti and Let-
tieri, 2009; Hoffmann and Busch, 2008). Although companies are
increasingly seeking to align their carbon reduction actions with
the goals of the Paris Agreement, the effect of setting SBT for car-
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Sustainable Production and Consumption 27 (2021) 1830–1840
bon reduction still received little attention to explore in the aca-
demic literature (Giesekam et al., 2021). A key question arising
from the corporate climate action literature is whether setting SBT
for carbon reduction is symbolic or substantive practice on en-
hancing firms’ CMR. Second, Kumar (2018) claims the mechanism
connecting firm environmental strategies to corporate reputation
is largely understudied. From this perspective, firms adopting ICP
strategy for carbon reduction whether have the substantive effec-
tiveness on enhancing firms’ CMR. Third, if corporate managers use
both SBT and ICP for carbon management practices at the same
time, there is still little research on the effect of additional en-
hancement of corporate CMR. Are there better implementation op-
tions for managers of different carbon emission attributes when
they use SBT and/or ICP to enhance firms’ CMR? All these are the
research gaps that have not been sufficiently explored in the car-
bon management-related literatures and need to be filled. The ob-
jective of this study is to answer these research questions. This pa-
per will provide supplementary evidences for green competitive-
ness theory, signaling theory and management theory.
2. Literature review
2.1. The comparison of carbon management reputation (CMR) among
different regions and countries
CDP (formerly, the Carbon Disclosure Project) is a nonprofit or-
ganization that provides a standardized online platform for firms
to evaluate their carbon footprints and carbon management prac-
tices on a voluntary basis. Based on the quality and integrity of
their responses to the survey, CDP will give each participant a
carbon disclosure score. A higher disclosure score indicates better
CMR. CDP made a significant change to its carbon disclosure scor-
ing system, which was to take effect in 2016. The scoring result
will be categorized into four levels of carbon management, which
from low to high are “disclosure”, “awareness”, “management” and
“leadership” (the highest level). This change transforms the intan-
gible corporate CMR into a “distinguishable” CMR level, similar to
how large financial institutions grade the financial credit of firms.
Undoubtedly, this kind of distinguishable CMR level is an impor-
tant signal of a firm’s commitment to mitigation of climate change
for stakeholders. CMR can be used as an important indicator to ob-
serve a firm’s competitiveness and readiness for low-carbon oppor-
tunities. In panel A of Table 1, 278 companies have acquired the
reputation of climate change A level (i.e., highest and leadership
level) in 2020 CDP’s survey. In the 2020 CDP’ regional survey, this
study found that more companies in Europe, Asia and North Amer-
ica have obtained the reputation of climate change A level. In addi-
tion, many companies in the U.S. and Japan have achieved A-level
climate change performance and reputation. In Asia, Japanese com-
panies account for 66% of companies that have obtained A-level
CMR.
2.2. Carbon management reputation (CMR) theories
2.2.1. Green competitiveness theory
Porter and van der Linde (1995) indicate that enforcement of
legislation on environmental protection motivates firms to seek
green innovations and improve their competitiveness. The latest
Paris Agreement explicitly reinforces the need for nations to adopt
carbon reduction policies, an action which has the potential to in-
fluence the adoption of carbon reduction efforts by organizations
throughout the world.
Shareholders and potential investors are concerned about the
risks associated with high carbon sectors and their ultimate le-
gitimacy as society raises more concerns about climate change
L. Kuo and B.-G. Chang Sustainable Production and Consumption 27 (2021) 1830–1840

Table 1 Clarkson et al. (2013) suggest that adopting an active environ-

The comparison of carbon management reputation (CMR) with A level (lead-
mental strategy and conveying this kind of signal to investors can
ership level) firms among different regions and countries.
increase the firm’s stock price. In recent years, commercial banks
Panel A have become more careful when lending loans to high-pollution
Region Number of firms Percent (%)
firms, because environmental pollution entails a higher financial
Africa 3 1 risk. Firms with higher borrowing power tend to have a higher
Asia 80 29 value. This can be the evidence for the assumption about corpo-
Europe 129 47
rate engagement in environmental protection and firm value. It is
Oceania 4 1
North America 58 21 mentioned in Yu (2015) that when investors find from the received
South America 4 1 signals that the company of interest has relatively lower potential
Total 278 100 environmental debt and risk, they will perceive a higher value and
Panel B
reputation of the company. The CMR’s signals also show regulatory
Region Country Number of firms Percent (%)
Asia Japan 53 66 compliance, allowing stakeholders to understand if the firm is at
Korea 11 14 risk of being suspended.
China and Taiwan 10 12.5 Signaling theory posits that firms with a better environmen-
India 4 5 tal performance tend to voluntarily disclose GHG emissions and
Other 2 2.5
those with an outstanding performance will even adopt innova-
Total 80 100
Region Country Number of firms Percent (%) tive techniques and make investments to reduce risks or emissions.
Europe UK 20 16 Clarkson et al. (2008) mentioned that the behavior of disclosing
France 16 12 information on GHG emissions will not be easily imitated by firms
Germany 16 12
which have not implemented any emission reduction measure. Be-
Spain 11 9
Other 66 51
sides, some scholars also stated that when stakeholders value cor-
Total 129 100 porate transparency, signals that come from the disclosure of GHG
Region Country Number of firms Percent (%) emissions can contribute better corporate image and reputation
North America USA 55 95 (Hahn et al., 2015; Ben-Amar et al., 2015; Hahn and Lülfs, 2014;
Canada 3 5
Luo et al., 2012).
Total 58 100

Source: CDP, 2020. CDP’s A List. https://www.cdp.net/en/companies/ 2.2.3. Management theory

companies-scores.
(Matsumura et al., 2014; Yang et al., 2018). Suppliers and cus-
tomers are choosing low carbon firms as their vendors to reduce
Scope 3 emissions in their supply chain (Grekova et al., 2016).
The proactive companies demonstrate their commitments to
reduce GHG emissions by setting carbon reduction targets inter-
nally. The approach starts with a board committee that provides
the carbon reduction strategy for implemental direction, supported
through intraorganizational arrangements in many functional areas
(Mahmoudian et al., 2021).
When developing the low carbon economy has become a na-
tional policy, firms may face suspension of business and lose their
competitiveness if they fail to comply with the standards set forth
by the policy.
Moreover, some researchers find that consumers prefer partly
circulated and low-carbon products, and circular and low-carbon
products can likely successfully enter the existing market at the
retail price of a new product (Hunka et al., 2021). The results show
a promising path for firms considering a transition to low-carbon
business models.
2.2.2. Voluntary disclosure theory (signaling theory)
Voluntary disclosure theory is also termed signaling theory
(Luo and Tang, 2014). According to voluntary disclosure theory,
when a company has made certain performance in carbon manage-
ment, “concealing the good deed” is certainly not what the com-
pany has hoped for (Luo, 2017).
Japan revised the Act on Promotion of Global Warming Counter-
measures in 2016 based on the adoption of the Paris Agreement.
Besides, Japan will strive to achieve a “decarbonized society” as
close as possible to 2050 with disruptive innovations (Ministry of
the Environment, Government of Japan, 2020). The company will
actively and voluntarily disclose its target and strategy of carbon
management in the hope of shaping a positive CMR. By conveying
positive and favorable information to stakeholders, they can distin-
guish themselves from companies of lower performance to avoid
adverse selection by investors.
Carbon management disclosure is conducted for two common
purposes: One is, as the final stage of carbon performance im-
provement, to report the carbon performance of the company to
the public. This is the so-called “inside-out” approach of manage-
ment (Schaltegger and Wagner, 2006). The other is to use disclo-
sure as a means to motivate the organization to pursue higher car-
bon management performance. This is the “outside-in” approach
of management (Burritt and Schaltegger, 2010). According to the
outside-in approach, having dialogues with stakeholders and re-
sponding to their expectations can help firms set the carbon tar-
get and strategy and guide them towards sustainable develop-
ment. The firms that embark on proactive carbon management
practices perform better than their counterparts that do not inte-
grate environmental solutions into their overall business strategy
(Adomako et al., 2019).
Setting carbon target and strategy provide stakeholders a
signal about a company’s dedication to improving the society
and the environment (Branco and Rodrigues, 2006). It also cre-
ates value and benefits (including a better corporate image)
(Hooghiemstra, 20 0 0), allowing firms to stand out from competi-
tors (Hasseldine et al., 2005) and boost their value (Clarkson et al.,
2015).
2.3. The effects of SBT and ICP on CMR
Businesses might suffer serious consequences if they continue
to treat climate change as an issue of corporate social responsi-
bility (CSR) rather than as a business problem. McWilliams and
Siegel (2001) proposed to view CSR as a foundation of corporate
resources and also as a strategy to maintain a competitive advan-
tage. Porter and Reinhardt (2007) mentioned that firms which gen-
erate an excessive amount of carbon emissions during the ship-
ping process are operating in an inefficient production model, be-
cause the cost of excessive carbon emissions will become a part of
the product costs and compromise the company’s competitiveness.
According to the resource-based view, excessive carbon emissions
are in fact the result of inefficient resource utilization. To cope
with climate change, businesses need to dig into the impacts of

1832
L. Kuo and B.-G. Chang
their operations on the environment “from the inside out” while
exploring “from the outside in” the effects of climate change, in-
cluding the business environment and policies, on their operations
(Porter and Reinhardt, 2007). In a study of management theories,
Senge (1990) mentioned that, in order to ensure organizational
performance, learning organizations would create a shared vision
for all members of the organization to work toward the goal. When
faced with changes and competition in the environment, organiza-
tions need to transform through learning so that they can make
correct decisions, gain momentum for survival and development,
and further maintain their competitive advantage (Guns, 1998;
Sadler, 2001). Based on the concept of learning organization, we ar-
gue that when faced with rapid changes brought by climate change
and pressures from stakeholders, learning organizations will con-
tinue to learn and innovate to make themselves a benchmark in
the capital market.
Compared to voluntary reduction targets proposed by firms fol-
lowing a self-evaluation of their capacity or the targets set accord-
ing to government regulations, the reduction level in SBT is es-
timated based on the scenario simulations of Intergovernmental
Panel on Climate Change’s Fifth Assessment Report (IPCC AR5). Be-
sides, KPMG (2018) mentions that setting SBT motivates firms to
control the rise in global warning within 2°C by a more scientific
manner, and setting SBT has gradually become a common practice
of carbon management among leading firms.
Only 266 firms from around the world had signed up to SBTi
since its launch in June 2015. However, more than 1,0 0 0 companies
worldwide are leading the zero-carbon transition by setting emis-
sions reduction targets through the SBTi (SBTi, 2020). Besides, be-
ginning in 2016, CDP includes an evaluation of commitment or im-
plementation of SBT into the questionnaire. This study infers that
institutional investors will pay more and more attention to firms’
environmental commitment when looking for companies to invest,
and firms which have made a commitment or setting SBT can pro-
vide richer and more tangible answers in CDP’s carbon manage-
ment survey and get a higher carbon management level, which is
a kind of CMR. Therefore, this study proposes:
H1: Firms which set SBT for carbon emission have higher CMR
Penrose (1995), the pioneer of the resource-based view, stated
that in order to be profitable, businesses not only have to pos-
sess superior resources but also effectively utilize them. Besides, in
pursuit of sustainable development, businesses need to formulate
strategies based on the external environmental and available in-
ternal resources. If they cannot put plans into action, they cannot
achieve their goals. Tang and Demeritt (2017) mentioned that the
premise of internal change is to respond to external changes. Firms
should have a thorough understanding of the carbon emission risks
and impacts of each activity in the company and the value chain
before they develop an action plan to solve problems. By extending
Porter’s hypothesis that environmental protection does not contra-
dict competitiveness (Porter, 1991), we infer that organizations that
adopt ICP strategy not only “do not evade the cost of external re-
sponsibilities” but also actively seek carbon reduction approaches
and be prepared for regulatory supervision (Chang, 2017).
Given the rapid changes in the environment and carbon risks,
internalizing external costs has become an important business
strategy. Microsoft is among the companies which have adopted
ICP strategy. According to Microsoft (2013), ICP has helped it
achieve higher efficiency and show a sense of responsibility and
leadership. ICP can not only be regarded as a strategy. Using ICP as
one of the measures of cost evaluation for a new investment can
increase the quality of financial evaluation. Besides, if internal car-
bon prices are considered in the selection of suppliers to reduce
the carbon risks of the supply chain, setting internal carbon prices
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Sustainable Production and Consumption 27 (2021) 1830–1840
is a way for businesses to be prepared for future uncertainties and
allow investors to clearly recognize their competitiveness level in
the low-carbon market (Aldy and Gianfrate, 2019). To sum up, this
study infers that businesses which adopt ICP strategy are able to
detect future carbon risks, create a common understanding within
the organization in advance and perform better in carbon emis-
sions management. Therefore, this study proposes:
H2: Firms which adopted ICP have higher CMR
If businesses set targets without a good strategy, it will be diffi-
cult for them to achieve these targets. Likewise, if businesses only
adopt a good carbon reduction strategy, they may find it hard to
achieve the targets that are expected by the society and can con-
tribute to mitigation of climate change. Therefore, it is particularly
important for Japanese firms to have a target attainment strategy
while setting SBT for carbon emission following government poli-
cies. ICP incorporates the future risks that companies need to bear
in the form of monetization, so that managers and employees can
have a consensus on the value of carbon reduction in advance.
As aforementioned, learning organizations will work for the com-
mon goal to ensure the organizational performance. Therefore, this
study hypothesizes that businesses which set SBT and also imple-
mented the ICP strategy will have higher CMR as follows:
H3: Firms which set SBT (carbon target) and adopted ICP
(carbon strategy) have higher CMR
2.4. Other control variables of CMR
It is documented in the literature that the characteristic factors
affecting corporate voluntary disclosure of carbon management in-
formation include size, debt ratio, industry sensitivity and prof-
itability. These factors are respectively discussed as follows.
Gonzalez-Gonzalez and Zamora-Ramírez (2016) found that
larger firms are under greater public scrutiny, so they tend to
disclose more carbon management information to increase their
transparency and maintain their environmental legitimacy. A num-
ber of scholars have proposed a similar argument, that is, firm size
is positively related to carbon disclosure (Al-Tuwaijri et al. 2004;
Stanny and Ely, 2008; Borghei and Leung, 2013; Peng et al., 2014).
The empirical results in Tang and Luo (2011) indicate that man-
agers of firms with higher operating risks are more likely to dis-
close carbon information to help investors more accurately evalu-
ate the firms’ value. Likewise, Ortas et al. (2014) also found that
firms with more debts have a relatively higher agency cost, and
they can lower the agency cost by disclosing more carbon manage-
ment information. Luo et al. (2012) showed that debt ratio is nega-
tively related to carbon disclosure but not to the significance level.
This finding was supported by Ho and Taylor (2007). However,
some recent studies (Stanny and Ely, 2008; Tang and Luo, 2011;
Ortas et al., 2014) obtained a positive relationship between debt
ratio and carbon disclosure.
HCEI has relatively greater impacts, no matter potential or
actual, on the environment. Many empirical studies have found
that HCEI tended to disclose more environmental information
(Walden and Schwartz, 1997; Bewley and Li, 20 0 0). Besides, HCEI’s
managers may be motivated to disclose carbon emissions and
management information to reduce their future compliance costs
(Clarkson et al., 2008; Cho et al., 2012; Peng et al., 2015).
Although Hackston and Milne (1996) suggested that high prof-
itability means that the managers can flexibly use the company’s
funds, there is no consistent finding with regard to the relationship
between profitability and environmental disclosure (Moneva and
Llena, 1996). However, recent studies have shown that firms with
higher profitability tend to have more funds to deal with the costs
L. Kuo and B.-G. Chang
Table 2
Sample composition.
Year Initial number of firms Final number of firms
2016 530 495
2017 542 504
2018 533 489
2019 540 506
N (=Number of firms) 2,145 1,994
of emissions, reductions and carbon management (Bewley and
Li, 20 0 0; Cormier et al., 20 04). Gonzalez-Gonzalez and Zamora-
Ramírez (2016) probed into the determinant factors of carbon dis-
closure. They used a Tobit regression model to analyze Spanish
firms which participated in CDP in 2012 and found that those with
higher profitability had relatively more resources to address prob-
lems arising from climate change.
3. Method
3.1. Sample selection
The sample period spans from 2016 to 2019, and the subjects
are Japanese firms which voluntarily participated in CDP’s climate
change survey during this period of time. The reliability of CDP
was confirmed in a 2012 survey (SustainAbility, 2012). To more in-
tuitively present the scoring result, starting from 2016, CDP would
show a company’s reputation level in carbon management as in a
credit rating system. The scoring system consists of the following
levels: Disclosure - measures the integrity of the information pro-
vided by the company (give D- or D); Awareness - measures the
level to which the company has evaluated the environmental prob-
lems, risks and impacts of its operations (give C- or C); Manage-
ment – measures the level to which the company has taken action,
adopted measures or strategies to address the environmental prob-
lems (give B- or B); Leadership – measures the level to which the
company has adopted particular steps that represent the best prac-
tice in the environmental management area (give A- or A). Firms
which fail to provide sufficient information to CDP to be evaluated
for this purpose will receive an F (i.e. insufficient or incomplete in-
formation). An F does not indicate a failure in environmental stew-
ardship (CDP, 2016, P.17). Due to the unique industry characteris-
tics, financial and insurance industries were excluded in this study
(Chih et al., 2008). The financial data of the sample firms were
obtained from eol AsiaOne database or the firms’ financial state-
ments available on their websites. Excluding firms in the financial
and insurance industries and firms without complete data for all
the variables, the final sample consisted of 1,994 firms, as shown
in Table 2.
3.2. Research model
The CDP is currently the main global reference as regards cor-
porate carbon management disclosure (Lee et al., 2015). Before
2016, companies are given a score that ranges from 0 (for no
answers given) to 100 (for complete disclosure) (Guenther et al.,
2016). In line with previous studies, scholars employ the CDP car-
bon disclosure score as a proxy variable for firms’ CMR using tobit
regression analysis (Dutta and Dutta 2020; Guenther et al., 2016;
Stanny, 2013). Moreover, some studies on CMR, the dependent vari-
able of research is whether or not the firm responds to the CDP
survey, and binary logistic regression model is used in these study
(e.g. Akbaş and Canikli, 2019; Li et al., 2019).
Since 2016, the CDP changed its scoring methodology by giving
a letter grade for each participating firm according to its response
to the CDP questionnaire. The grade is based on ordinal four-level
1834
Sustainable Production and Consumption 27 (2021) 1830–1840
scale: disclosure, awareness, management and leadership. Recently,
Al-Qahtani and Elgharbawy (2020) also used the new CDP scoring
system to measure ordinal level on CMR, so ordinal logistic regres-
sion is used for data analysis.
This study focuses on the period of 2016–2019 to examine the
proposed hypotheses, H1, H2 and H3, so this study develops an or-
dinal logistic regression model (1) for subsequent analysis. Accord-
ing to the aforementioned literature, using ordinal logistic regres-
sion is very suitable for this study.
CMRi,t = β0 + β1 SBTi,t + β2 ICPi,t + β3 SBTi,t ∗ ICPi,t + β4 SIZEi,t
+ β5 SENi,t + β6 LEVi,t + β7 NIi,t + YearDum + εi,t (1)
where i and t denote firm i in year t, respectively; CMR indicates
carbon disclosure level (CDL). In this study, CDL was obtained from
CDP’s survey reports, and CDL levels (A, A-, B, B-, C, C-, D, D- and
F) were converted in order into numerical scores, including 8, 7,
6, 5, 4, 3, 2, 1 and 0, where higher scores indicate higher CMR.
SBT: 1 is given if the firm clearly states that it has set SBT, and
0 is given if otherwise. ICP: 1 denotes that the firm has adopted
the ICP strategy, and 0 denotes the firm has not. SBT∗ ICP: This is
an interaction term of SBT and ICP. This term is 1 if the firm has
set SBT and also adopted ICP, and it is 0 if otherwise. SIZE denotes
firm size. We first took the natural logarithm of each firm’s as-
sets. Firm with a value higher than the mean were set as 1, those
without were set as 0. SEN is a dummy variable, where 1 indicates
the firm belongs to HCEI, such as materials, industrials, energy, and
utilities (Luo and Tang, 2014), and 0 indicates the firm belongs to
NHCEI. LEV is a dummy variable, where 1 indicates the firm has a
debt ratio (total debts over total assets) higher than the industry
average, and 0 indicates the firm does not. NI is a dummy variable,
where 1 indicates that the firm has a positive net income, and 0
indicates the firm does not. YearDum is a dummy variable; ε is an
error term.
4. Results
4.1. Descriptive statistics
Table 3 shows the descriptive statistics for each variable. As
shown in Table 2, the mean values of CMR, SBT, ICP, SBT∗ ICP, SIZE,
SEN, LEV and NI are 3.05, 0.06, 0.12, 0.03, 0.50, 0.22, 0.53 and 0.96
respectively.
4.2. Correlation analysis
The correlations between the variables are shown in Table 4
(Panel A). Except the correlation between SIZE and LEV (0.421),
which is slightly higher, all the correlations are low. In order to
avoid collinearity between the variables, the variance inflation fac-
tors (VIF) were further tested. As shown in Panel B of Table 4, all
the VIF coefficients are lower than 2, suggesting no collinearity be-
tween the variables. That is to say, each predictor has a unique
characteristic, and none of the research variables is statistically
similar to another.
4.3. Independent-sample t-test of CMR
Table 5 provides the results of an independent-sample t-test ex-
amining if there are differences in CMR among the sample firms.
The panel A of Table 5 shows that the average CMR scores of
the sample firms that setting SBT (N = 127) and those that do
not set SBT (N = 1,867) are 6.70 and 2.80, respectively, and there
are a significant difference (t = 15.224). Besides, panel B shows
that the average CMR scores of the sample firms that adopting ICP
(N = 242) and those that did not adopt ICP were 6.26 and 2.60, re-
spectively, and there are also a significant difference (t = 19.716).
L. Kuo and B.-G. Chang Sustainable Production and Consumption 27 (2021) 1830–1840

Table 3 Table 5
Descriptive statistics. CMR t-test.a

Mean SD Min Max Panel A: Difference of CMR for firms on setting SBT and Non-SBTb

CMR 3.05 2.95 0.0 8 SBT(N=127) b Non-SBT(N=1,867) b t value

SBT 0.06 0.24 0.0 1 Mean (Std. Err.) Mean (Std. Err.)
ICP 0.12 0.33 0.0 1 CMR 6.70 (0.139) 2.80 (0.066) 15.224∗ ∗ ∗
SBT∗ ICP 0.03 0.17 0.0 1 Panel B: Difference of CMR for firms on adopting ICP and Non-ICPc
SIZE 0.50 0.50 0.0 1
SEN 0.22 0.41 0.0 1 ICP(N=242) Non-ICP(N=1,752) t value
LEV 0.53 0.50 0.0 1 CMR 6.26 (0.095) 2.60 (0.068) 19.716∗ ∗ ∗
NI 0.96 0.20 0.0 1 Notes: a Table 5 provides the results of an independent-sample t-test
N (=Number of firms) 1,994 which examines if there are differences in CMR among the sample firms.
b
Note: CMR indicates carbon disclosure level (CDL). In this The results allow us to realize the effectiveness of setting SBT and not
study, CDL was obtained from CDP’s survey reports, and CDL setting SBT (non-SBT) among firms. The SBT group consists of 127 firms,
levels (A, A-, B, B-, C, C-, D, D- and F) were converted in or- and the Non-SBT group consists of 1,867 firms. c The results allow us to
der from high to low into numerical scores, including 8, 7, compare the effectiveness of adopting ICP and not adopting ICP (Non-
6, 5, 4, 3, 2, 1 and 0, where higher scores indicate higher ICP); the ICP group consists of 242 firms, and the Non-ICP group consists
CMR. SBT: 1 is given if the firm clearly states that it has set of 1,752 firms. ∗ p< 0.1;∗ ∗ p< 0.05; ∗ ∗ ∗ p< 0.01.
SBT, and 0 is given if otherwise. ICP: 1 denotes that the firm
has adopted the ICP strategy, and 0 denotes the firm has not.
SBT∗ ICP: This is an interaction term of SBT and ICP. This term of ICP on CMR is also significantly positive (Z=12.95), offering sup-
is 1 if the firm has set SBT and also adopted ICP, and it is 0 port for H2. However, SBT∗ ICP has a significantly negative effect
if otherwise. SIZE denotes firm size. We first took the natu-
ral logarithm of each firm’s assets. Firm with a value higher
on CMR (Z = −2.23), so H3 is rejected. SIZE is positively and sig-
than the mean were set as 1, those without were set as 0. nificantly related to CMR. Previous studies have shown that larger
SEN is a dummy variable, where 1 denotes that the firm be- firms are capable of disclosing more carbon management informa-
longs to HCEI, and 0 denotes that the firm belongs to NHCEI. tion (Al-Tuwaijri et al., 2004; Ben-Amar et al., 2015). Therefore, we
LEV is a dummy variable, where 1 indicates the firm has a
infer that larger firms have more capacity and resources to pay at-
debt ratio (total debts over total assets) higher than the in-
dustry average, and 0 indicates the firm does not. NI is a tention to carbon management practices and are willing to release
dummy variable, where 1 indicates that the firm has a posi- information to the public. As a result, they can achieve higher CMR.
tive net income, and 0 indicates the firm does not. SEN is positively and significantly related to CMR (Z = 2.15), indi-
cating that compared to NHCEI’s firms, HCEI’s firms will be more
motivated to disclose carbon emissions and management informa-
In short, Table 5 shows that firms which setting SBT (carbon tar- tion to establish legitimacy and reduce the future compliance costs
get) or adopting ICP (carbon strategy) will get a higher CMR score (Kuo and Chen, 2013). This may explain why H3 is not supported,
compared to firms which have not utilized any of the two tools. because it is the mixed effect using full samples. Instead, their in-
dustry sensitivity characteristic would lead to higher CMR. LEV is
4.4. Regression analysis positively and significantly related to CMR (Z = 2.17), and NI af-
fects CMR negatively but not to a significance level (Z = −0.37).
Subsequently, other determined factors of CMR were integrated Further, the odds ratio (OR) is examined in column (3) of
into model (1) for an ordinal logistic regression analysis. As shown Table 6. An odds ratio (OR) is a measure of association between
in Column (1)(2) of Table 6, after the control variables of CMR are an exposure and an outcome. The OR represents the odds that
included in the model, SBT’s effect on CMR remains significantly an outcome will occur given a particular exposure, compared to
positive (Z = 11.46). Hence, H1 is supported. Likewise, the effect the odds of the outcome occurring in the absence of that expo-

Table 4
Correlation matrix.

Panel A: Pearson Correlation

CMR SBT ICP SIZE SEN LEV NI

CMR 1
SBT 0.323∗ ∗ ∗ 1
ICP 0.404∗ ∗ ∗ 0.274∗ ∗ ∗ 1
SIZE 0.399∗ ∗ ∗ 0.117∗ ∗ ∗ 0.212∗ ∗ ∗ 1
SEN 0.0950∗ ∗ ∗ -0.0193 0.126∗ ∗ ∗ 0.0659∗ ∗ ∗ 1
LEV 0.178∗ ∗ ∗ 0.0668∗ ∗ ∗ 0.0302 0.421∗ ∗ ∗ 0.00436 1
NI -0.0236 -0.0618∗ ∗ ∗ -0.0101 0.00491 -0.0335 -0.0919∗ ∗ ∗ 1

Panel B: VIF Value

SBT ICP SIZE SEN LEV NI

1.09 1.15 1.29 1.02 1.24 1.02

Note: CMR indicates carbon disclosure level (CDL). In this study, CDL was obtained from CDP’s survey reports, and
CDL levels (A, A-, B, B-, C, C-, D, D- and F) were converted in order from high to low into numerical scores, including
8, 7, 6, 5, 4, 3, 2, 1 and 0, where higher scores indicate higher CMR. SBT: 1 is given if the firm clearly states that
it has set SBT, and 0 is given if otherwise. ICP: 1 denotes that the firm has adopted the ICP strategy, and 0 denotes
the firm has not. SBT∗ ICP: This is an interaction term of SBT and ICP. This term is 1 if the firm has set SBT and also
adopted ICP, and it is 0 if otherwise. SIZE denotes firm size. We first took the natural logarithm of each firm’s assets.
Firm with a value higher than the mean were set as 1, those without were set as 0. SEN is a dummy variable, where
1 denotes that the firm belongs to HCEI, and 0 denotes that the firm belongs to NHCEI. LEV is a dummy variable,
where 1 indicates the firm has a debt ratio (total debts over total assets) higher than the industry average, and 0
indicates the firm does not. NI is a dummy variable, where 1 indicates that the firm has a positive net income, and
0 indicates the firm does not. ∗ p<0.1, ∗ ∗ p<0.05, ∗ ∗ ∗ p<0.01.

1835
L. Kuo and B.-G. Chang Sustainable Production and Consumption 27 (2021) 1830–1840

Table 6 Table 7
Ordinal logistic regression of SBT, ICP and SBT∗ ICP on CMR. Ordinal logistic regression of SBT, ICP and SBT∗ ICP on CMR (HCEI vs. NHCEI).

CMR Panel A (HCEI)

(1) (2) (3) Dependent variables CMR

Coefficient Z statistics Odds Ratio (OR)
(1) (2) (3)
SBT 2.723∗ ∗ ∗ 11.46 15.22 Independent variables Coefficient Z statistics Odds Ratio (OR)
ICP 1.849∗ ∗ ∗ 12.95 6.35
SBT 1.536∗ ∗ 2.54 4.65
SBT∗ ICP -0.836∗ ∗ -2.23 0.43
ICP 1.532∗ ∗ ∗ 6.23 4.63
SIZE 1.230∗ ∗ ∗ 12.70 3.42
SBT∗ ICP 2.310∗ ∗ 2.46 10.07
SEN 0.215∗ ∗ 2.15 1.24
SIZE 1.343∗ ∗ ∗ 6.65 3.83
LEV 0.201∗ ∗ 2.17 1.22
SEN - - -
NI -0.0785 -0.37 0.92
LEV 0.232 1.23 1.26
YearDum Control
NI 0.729∗ 1.79 2.07
LR chi2 772.55
YearDum Control
Prob > chi2 0.0000
LR chi2 200.58
Pseudo R2 0.1146
Prob > chi2 0.0000
Number of firms 1,994
Pseudo R2 0.1263
Note: CMR indicates carbon disclosure level (CDL). In this study, CDL Number of firms 438
was obtained from CDP’s survey reports, and CDL levels (A, A-, B, B-
Panel B (NHCEI)
, C, C-, D, D- and F) were converted in order from high to low into
numerical scores, including 8, 7, 6, 5, 4, 3, 2, 1 and 0, where higher Dependent variables CMR
scores indicate higher CMR. SBT: 1 is given if the firm clearly states
that it has set SBT, and 0 is given if otherwise. ICP: 1 denotes that (1) (2) (3)
the firm has adopted the ICP strategy, and 0 denotes the firm has not. Independent variables Coefficient Z statistics Odds Ratio (OR)
SBT∗ ICP: This is an interaction term of SBT and ICP. This term is 1 if SBT 2.834∗ ∗ ∗ 11.13 17.01
the firm has set SBT and also adopted ICP, and it is 0 if otherwise. ICP 2.063∗ ∗ ∗ 11.66 7.87
SIZE denotes firm size. We first took the natural logarithm of each SBT∗ ICP -1.514∗ ∗ ∗ -3.62 .22
firm’s assets. Firm with a value higher than the mean were set as SIZE 1.206∗ ∗ ∗ 10.86 3.34
1, those without were set as 0. SEN is a dummy variable, where 1 SEN - - -
denotes that the firm belongs to HCEI, and 0 denotes that the firm LEV 0.184∗ 1.78 1.20
belongs to NHCEI. LEV is a dummy variable, where 1 indicates the NI -0.357 -1.43 0.70
firm has a debt ratio (total debts over total assets) higher than the YearDum Control
industry average, and 0 indicates the firm does not. NI is a dummy LR chi2 577.38
variable, where 1 indicates that the firm has a positive net income, Prob > chi2 0.0000
and 0 indicates the firm does not. ∗ p<0.1, ∗ ∗ p<0.05, ∗ ∗ ∗ p<0.01. Pseudo R2 0.1131
Number of firms 1,556

sure. When an ordinal logistic regression is calculated, the regres-
sion coefficient (b1) is the estimated increase in the log odds of
the outcome per unit increase in the value of the exposure. In
other words, the exponential function of the regression coefficient
(eb1 ) is the odds ratio associated with a one-unit increase in the
exposure (Szumilas, 2010). The column (3) of Table 6 shows that
the OR of obtaining a higher CMR for firms with setting SBT than
those without SBT is 15.22 times; the OR of obtaining a higher
CMR for firms adopting ICP than those without ICP is 6.35 times.
These findings mean that firms can obtain a higher CMR by ei-
ther setting SBT or implementing ICP strategy, but setting SBT has
a higher OR than implementing ICP strategy for improving firm’s
CMR. Furthermore, the interaction term shown in column (3) of
Table 6 indicates that firms, both setting SBT and ICP, only have
0.43 times OR to obtain a higher CMR than other approaches (in-
cluding only SBT but no ICP, or only ICP but no SBT, or neither).
The empirical results in Table 6 also manifest that HCEI is associ-
ated with higher CMR as compared with NHCEI. This finding en-
couraged us to probe into the following questions: How should
HCEI’s managers enhance CMR through suitable climate actions?
Is the adoption of only one carbon management tool, SBT or ICP,
well enough? Or do they need to adopt both tools to benefit from
a complementary effect? The answer is presented in Table 7.
In Table 7, the sample is divided into two groups, namely HCEI
and NHCEI. In Table 7, panel A shows the result of the regression
equation examining the effects of SBT, ICP, and SBT∗ ICP (adoption
of both tools) on CMR among HCEI’s firms; Panel B shows the re-
sults among NHCEI’s firms. From panel A, it is found that HCEI’s
firms adopt SBT and ICP with an OR of 10.07 times in improving
CMR compared to other approaches (including only SBT but no ICP,
or only ICP but no SBT, or neither). The OR of SBT∗ ICP is much
higher than that of only SBT (OR = 4.65 times) and that of only
ICP (OR = 4.63 times). This means that HCEI’s firms, setting SBT
Note: CMR indicates carbon disclosure level (CDL). In this study, CDL was
obtained from CDP’s survey reports, and CDL levels (A, A-, B, B-, C, C-, D,
D- and F) were converted in order from high to low into numerical scores,
including 8, 7, 6, 5, 4, 3, 2, 1 and 0, where higher scores indicate higher
CMR. SBT: 1 is given if the firm clearly states that it has set SBT, and 0 is
given if otherwise. ICP: 1 denotes that the firm has adopted the ICP strategy,
and 0 denotes the firm has not. SBT∗ ICP: This is an interaction term of SBT
and ICP. This term is 1 if the firm has set SBT and also adopted ICP, and it
is 0 if otherwise. SIZE denotes firm size. We first took the natural logarithm
of each firm’s assets. Firm with a value higher than the mean were set as
1, those without were set as 0. SEN is a dummy variable, where 1 denotes
that the firm belongs to HCEI, and 0 denotes that the firm belongs to NHCEI.
LEV is a dummy variable, where 1 indicates the firm has a debt ratio (total
debts over total assets) higher than the industry average, and 0 indicates the
firm does not. NI is a dummy variable, where 1 indicates that the firm has
a positive net income, and 0 indicates the firm does not. ∗ p<0.1, ∗ ∗ p<0.05,
∗∗∗
p<0.01.
and adopting ICP, can create a significant or additional effect in im-
proving firms’ CMR. However, from column (3) of Table 7 panel B,
it is found that NHCEI’s firms adopt SBT and ICP with an OR of 0.22
times in improving firms’ CMR compared to other approaches. The
OR of SBT∗ ICP is lower than that of only SBT (OR = 17.01 times)
and that of only ICP (OR = 7.87 times). This shows that it is not
cost-effective for NHCEI to implement both SBT and ICP simulta-
neously. Instead, adopting SBT for priority action will be more ap-
propriate for NHCEI in improving firms’ CMR.
4.5. Robustness check
To assess the sensitivity of the empirical results to the model, a
robustness check was carried out. In the test of robustness, Nikkei
225 index was used as a proxy variable for firm size. The SIZE vari-
able was re-measured, and the new regression equation was esti-
mated. The results are presented in Table 8. As shown in column
(1)(2)(3) of Table 8, the OR results for SBT, ICP and SBT∗ ICP in re-

1836
L. Kuo and B.-G. Chang Sustainable Production and Consumption 27 (2021) 1830–1840

Table 8
Robustness check.

Dependent variables CMR

Full sample (1) HCEI (2) NHCEI (3)

Independent variables Odds Ratio (OR) Odds Ratio(OR) Odds Ratio(OR)

SBT 16.19 4.31 18.68
ICP 7.89 5.76 9.70
SBT∗ ICP 0.38 11.00 0.19
Nikkei 225 2.33 2.77 2.25
SEN 1.35 - -
LEV 1.88 1.74 1.90
NI 0.95 1.97 0.74
YearDum Control Control Control
LR chi2 657.23 173.76 490.70
Prob > chi2 0.0000 0.0000 0.0000
Pseudo R2 0.0975 0.1094 0.0961
No. of firms 1,994 438 1,556

Note: CMR indicates carbon disclosure level (CDL). In this study, CDL was obtained
from CDP’s survey reports, and CDL levels (A, A-, B, B-, C, C-, D, D- and F) were con-
verted in order from high to low into numerical scores, including 8, 7, 6, 5, 4, 3, 2,
1 and 0, where higher scores indicate higher CMR. SBT: 1 is given if the firm clearly
states that it has set SBT, and 0 is given if otherwise. ICP: 1 denotes that the firm has
adopted the ICP strategy, and 0 denotes the firm has not. SBT∗ ICP: This is an inter-
action term of SBT and ICP. This term is 1 if the firm has set SBT and also adopted
ICP, and it is 0 if otherwise. Nikkei 225: A dummy variable of firm size. 1 indicates
the firm is a constituent of Nikkei 225 index, and 0 indicates the firm is not. SEN is a
dummy variable, where 1 denotes that the firm belongs to HCEI, and 0 denotes that
the firm belongs to NHCEI. LEV is a dummy variable, where 1 indicates the firm has a
debt ratio (total debts over total assets) higher than the industry average, and 0 indi-
cates the firm does not. NI is a dummy variable, where 1 indicates that the firm has a
positive net income, and 0 indicates the firm does not. ∗ p<0.1, ∗ ∗ p<0.05, ∗ ∗ ∗ p<0.01.

lation to CMR are consistent with the previous conclusion. Simply
put, it is not cost-effective for NHCEI’s firms to implement both
SBT and ICP simultaneously. Instead, setting SBT for priority action
will be more appropriate for NHCEI in improving CMR. In addition,
only HCEI’s firms can get a significant or additional effect when
they use both SBT and ICP to upgrade CMR.
5. Discussion
5.1. Discussion of results
There are three main objectives to this study. First, it is to in-
vestigate the effects of setting SBT for carbon reduction on enhanc-
ing firms’ CMR. Second, it is to explore the effects of adopting ICP
for carbon emission on enhancing firms’ CMR. Third, it is to probe
the incremental effects of enhancing firms’ CMR when corporate
managers use both SBT and ICP for carbon management practices.
Are there better implementation options for managers of different
carbon emission attributes when they use SBT and/or ICP to en-
hance firms’ CMR?
The empirical results show that setting SBT or adopting ICP
for carbon reduction have significantly positive effects on enhanc-
ing firms’ CMR, respectively. In addition, the results indicate that
HCEI’s managers are advised to implement both SBT and ICP cop-
ing climate change, because ambitious climate actions can effec-
tively improve CMR for HCEI. On the contrary, it is not cost-
effective for NHCEI to implement both SBT and ICP simultaneously,
and setting SBT for priority action will be more appropriate for
NHCEI in improving firms’ CMR.
In this study, why did the use of both SBT and ICP not increase
the firms’ CMR? The reason is that 22% of full samples are HCEI
and 78% are NHCEI, so mixed results are produced. After distin-
guishing the samples into NHCEI and HCEI, the results of this study
find that only firms in HCEI, setting SBT and adopting ICP, can cre-
ate the incremental effect in enhancing firms’ CMR.
Consistent with previous literature, empirical finding of this
study indicates that firms in HCEI will be more motivated to dis-
close carbon emissions and management information to estab-
lish legitimacy and reduce the future compliance costs in Japan
(Kuo and Chen, 2013). Japanese government required that firms
provide greenhouse gas emission for an important qualification of
contract bidders in government procurement, especially for con-
tracts of power procurement (Kuo and Chen, 2013). Moreover, the
environmental management literature also shows that the real
value of low-carbon actions to environmentally-sensitive industries
(ESIs) lie in those actions that can effectively eliminate environ-
mental burdens (Kuo and Chang, 2021). Our empirical results echo
this existing literature.
A key question arising from the corporate climate action litera-
ture is whether target-setting practices are symbolic or substantive
(Dahlmann et al., 2017). One study in particular calls for greater
empirical evidence to evaluate the role of SBT as an emerging cor-
porate climate governance tool (Walenta, 2020). With the main-
streaming of corporate climate disclosure and target setting, there
has been an associated shift towards evaluating the quality and ef-
fectiveness of these commitments (Zhang and Liu, 2020). Consis-
tent with the previous literature, this study found that firms set-
ting SBT for carbon emission have the substantive effectiveness on
enhancing firms’ CMR.
A geographic breakdown shows that 28 percent of companies in
Europe are using internal carbon pricing. Japan, the United King-
dom, and the United States have the highest percentage of com-
panies using this mechanism-with 24 percent, 20 percent, and
15 percent, respectively, of companies in those countries tallied
(Mckinesy, 2021). At the same time, the survey shows that Japan is
the country with the most climate governance A level companies
in Asia (CDP, 2020). Scholars show that the ICP depends to a large
extent on the national climate policy (Bento and Gianfrate, 2020).
Moreover, consistent with the previous literature, this study also
found that firms adopting ICP for carbon reduction have the sub-
stantive effectiveness on enhancing firms’ CMR in Japan.
ICP was a key factor, for instance, in a European energy com-
pany’s (i.e., carbon-intensive company) decision to close several
power plants, as the internal charge on increased carbon emissions

1837
L. Kuo and B.-G. Chang
cut into the expected profitability of those plants (Mckinesy, 2021).
This means that ICP is an effective risk strategy tool for companies
in carbon-intensive industries, but it also affects firms’ profitabil-
ity. In this study, the results indicate that HCEI’s managers are ad-
vised to implement both SBT and ICP coping climate change, be-
cause ambitious climate actions just can effectively improve CMR
for HCEI. On the contrary, it is not cost-effective for NHCEI to im-
plement both SBT and ICP simultaneously.
5.2. Implications for research
By setting SBT or adopting ICP for carbon reduction, firms can
prepare themselves for the uncertainties of the future external
carbon price and also enable investors to clearly identify their
competitiveness level in the low carbon world (Aldy and Gian-
frate, 2019). Consistent with green competitiveness theory, this
study found that firms setting SBT or adopting ICP for carbon emis-
sion have the substantive effectiveness on enhancing firms’ CMR.
CMR is an important intangible asset for firms in the past, present
and future, because investors are paying more attention to the
risks and opportunities of companies under low-carbon demands.
Consistent with signaling theory, CMR is an important signal for
climate fund managers to make decisions, because corporate rep-
utation as a key organizational factor or asset (Barnett et al.,
2006) responsible for a firm competitiveness. It is mentioned in
Yu (2015) that when investors find from the received signals that
the company of interest has relatively lower potential environmen-
tal debt and risk, they will perceive a higher value and reputation
of the company. The CMR’s signals also show regulatory compli-
ance, allowing stakeholders to understand if the firm is at risk of
being suspended. Consistent with management theory, this study
means that the company actively responds to stakeholders’ de-
mands for low-carbon management with substantive SBT or ICP for
carbon reduction.
5.3. Implications for practice
For firms, it is necessary to employ different approaches to
hedge risks stemming from climate change. Every approach may
have a different effect on risk mitigation. In order to improve CMR,
HCEI’s managers are advised to implement SBT by submitting their
carbon targets to SBTi for certification and adopt the ICP strategy
simultaneously. However, these approaches are not cost-effective
for NHCEI’s firms. Instead, priority setting SBT will be more appro-
priate for NHCEI in improving CMR.
5.4. Implications for national policy
One of the most influential stakeholders of a country is the
government because of its authority to enact the national pol-
icy. Carbon pricing at the national level is a public policy of the
government to reduce emissions. When the government adopts
such policies, firms are expected to participate and respond to
changes to that policy (Post and Preston, 2012). In carbon pricing,
Japan adopted the carbon tax at national level (Anwar et al., 2020).
Scholars also show that the ICP depends to a large extent on the
national climate policy (Bento and Gianfrate, 2020).
Recently, Japan has been promoting long-term climate mea-
sures and become a country where firms are urged and assisted to
set SBT by the government’s promotion. The results of this study
imply that Japanese firms are guided by the government to re-
sponse towards a low-carbon society, and their managers adopt an
appropriate carbon management tool, namely SBT, ICP or both, de-
pending on the carbon emission attribute of their company. This
way, they can effectively mitigate the possible risks of climate
change in an ever-evolving regulatory. When the government plays
1838
Sustainable Production and Consumption 27 (2021) 1830–1840
a leading role in climate policy, it will affect the company’s carbon
reduction target setting and strategic actions. Empirical evidence
shows that Japanese national policy-related climate change has a
guiding effect on enterprises.
5.5. Limitation and future research
Fujii and Tatsuo (2012) pointed out that the mechanism of en-
vironmental management is obviously different in different regions
or countries, because each region or country has implemented its
own environmental plan according to its unique national and eco-
nomic system. An important limitation of this work is that this re-
search only focuses on Japanese companies. These results cannot
be extended to other developed or developing countries.
As of 1 July 2020, only 21 publications indexed in Scopus con-
tained references to science-based targets in their title, abstract or
keywords. A further 46 search results include the term in other
fields. Of those using the phrase in a relevant context, only a hand-
ful directly address the topic (Giesekam et al., 2021). This shows
that SBT-related research is still in the initial stage. Furthermore,
the national carbon pricing gradually enhances the threat of more
stringent disclosure regulations. In response, firms also enhance
voluntary disclosures to avoid any potential adverse regulatory ac-
tion by the government or other regulatory bodies (Suijs and Wiel-
houwer, 2019). Further research is needed to investigate the effects
of using SBT or (and) ICP on enhancing firms’ CMR in developing
countries, as well as in developed countries.
6. Conclusion
Since the Paris Agreement went into effect, all Parties have
been required to propose and communicate NDCs. First, in order
to avoid worsening of climate change, controlling the average rise
in global warming below 2°C has become a non-negotiable target.
Second, the governments of all Parties have to transform the emis-
sions reduction mission into low-carbon requirements for their do-
mestic firms. In this situation, how should firms keep up with the
low-carbon risks and opportunities that may arise in future inter-
national trade? Recently, the Japanese government has been pro-
moting long-term climate measures. However, little research has
probed into how Japanese firms can effectively utilize these car-
bon management tools (strategies) (i.e., SBT and ICP) to improve
CMR. CMR can be viewed as an important indicator of competitive-
ness in a green low-carbon market. Based on this perspective, this
study conducts an ordinal logistic regression of data collected from
1,994 Japanese firms which voluntarily participated in CDP’s sur-
veys during 2016-2019. The results indicate that HCEI’s managers
are advised to adopt both SBT and ICP coping climate change, be-
cause ambitious climate actions just can upgrade HCEI’s CMR. On
the contrary, it is not cost-effective for NHCEI’s firms to implement
both SBT and ICP simultaneously, and priority setting SBT will be
more preferable for NHCEI in improving CMR. So far, there is still
limited research related to effects of setting SBT and/or ICP strat-
egy for mitigating climate change risk in Japan. The aim of this
research is to fill this gap.
Declaration of Competing Interest
None.
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