Predicting the Risk of High Carbon Emissions from Financial Ratios

Firm-level carbon emissions, while directly measurable, are often reported with delays or incomplete information, particularly for firms not subject to mandatory disclosure. Understanding and predicting the risks of high carbon emissions is therefore essential for financial analysis in economies pursuing sustainability. This study investigates the relationship between carbon emissions and financial ratios using firm-level data from the Taiwan Economic Journal for the period 2005 to 2020. The empirical findings reveal that financial ratios can serve as effective predictors of high carbon emission risk, with clear industry-specific differences. While the relevant predictors differ across industries, our results suggest that the receivables-to-sales ratio may serve as a useful early-warning financial indicator for identifying firms at greater risk of high carbon emissions. Overall, the study develops a cost-effective and forward-looking early-warning mechanism that enables governments, investors, and companies to manage carbon-related risks by leveraging readily available financial information.