The Role of Stock Exchange Financing in Mitigating Greenhouse Gas Emissions Risk in the Paper Industry
Article information
Abstract
Background and objective
Global warming continues to increase along with increasing carbon emissions in the world. One industrial sector that is concerned about increasing carbon emissions is the paper companies because it uses wood as a raw material and uses quite a lot of energy. The greater the paper production capacity produced, the greater the carbon emissions. One important factor in developing and increasing production capacity is financing, which can come from equity, bank loans, bonds, and stock. Thus, financing sources directly contribute to carbon emissions which can be measured through finance emissions. This research examines the contribution of financing mechanisms to mitigate carbon emission risks.
Methods
The method used is carbon accounting developed by PCAF using purposive sampling data from the paper companies traded on the Indonesian stock exchange.
Results
This research result shows that financing schemes have a significant role in carbon emissions in the paper companies with an attribution factor value of 0.31 to 0.52 and a finance emissions value of 2,011,194 tCO2e to 6,844,866 tCO2e. Based on data from sample of the paper company, it shows the attribution factor value is above 0.31, if a sustainable financial policy is implemented for financing through shares, it can reduce carbon emissions by at least 31%.
Conclusion
The paper companies not only have a significant role in Indonesia’s economy but also encourage an important role in mitigating carbon emissions. One of the important components in financing the pulp and paper companies is shares. One key indicator of the impact of stock ownership on emissions in the pulp and paper industry is the attribution factor, which can be as high as 0.52, as observed in Company B. The public as shareholders and can become controllers of the Company can imply an important role in managing emissions from pulp and paper sector in Indonesia.
Introduction
Climate change and global warming are a big challenge for the world. The global climate is experiencing significant and rapid transformations. Researchers suggested that the global average Earth's surface temperature showed a steady increase since the mid-20th century, with an estimated rise per decade around 0.2°C (Kozarcanin et al, 2019). In 2021, the average global temperature reached 1.11°C above pre-industrial levels, nearing the threshold of 1.5°C from the Paris Agreement's target. The issue of climate risk continues to be one of the most anticipated global challenges of the coming decades, emphasizing the urgency of both adaptation and mitigation strategies to acknowledge the impacts of global climate change (Sun et al, 2023). The primary cause of climate change is global warming, fueled by rising concentrations of carbon emissions, predominantly originating from fossil fuels combustion (Rodriguez et al, 2023).
The continuous increase in greenhouse gas emissions is caused by several things such as previous unequal contributions, uneven energy use sustainability, land use and change, lifestyle and consumption patterns of society, and production between regions and even within countries and between countries (IPCC, 2023). According to Pratiwi et al. (2022), Climate change has the potential to escalate health-related losses, accounting for up to 1.8% the national Gross Domestic Product (GDP) of Indonesia. Changing temperature and rainfall patterns serve as key indicators of climate change in Indonesia (Suryadi, et al, 2018). One thing that can reduce climate change is forests (Kauppi et al, 2022).
Climate change affects economic and company conditions through the occurrence of two risks, namely physical risk and transition risk. Physical risks are closely related to ecosystem damage which ultimately affects economic activities (Bebbington et al., 2020). Physical risks are potential risks that arise due to climate impacts, such as floods, typhoons, high temperatures, fires, sea level rise, and other events. There are two categories of physical risks: acute physical risks and chronic physical risks. Acute physical risk refers to the immediate and short-term impacts of climate-related events, typically characterized by sudden onset and high intensity, while chronic physical risks are long-term shifting events (Woetzel et al., 2020). Meanwhile, transition risks are risks arising from mitigation and adaptation efforts to climate change (Semieniuk, 2021; OJK, 2024). One source of transition risk is regulatory changes aimed at encouraging the transition toward a low-carbon economy. These regulations may encompass emission limits, carbon taxes, or outright bans on specific fossil fuels (Semieniuk, 2021).
Forests have a crucial function for humans (Ali, 2023). Forests have three main functions, namely environmental, social, and economic functions. The environmental function of forests is closely related to climate, biodiversity, water, and soil (Suryanto et al, 2023). Social function is focused on the individual's relationship with the forest (Borg, 2015). The social strength of the people in the forest will prevent environmental damage (Oktalina et al, 2022). Meanwhile, the economic function focuses on the beneficial value of forests, including losses and damage (Enda et al, 2022). These three forest functions are included in the concept of sustainable forest management (SFM). In its development, the hopes and concepts for SFM developed to include biodiversity, climate change, and renewable energy (Prins, 2023). Forests play a crucial role in managing the impacts of climate change (Kyriaki, 2024).
Forests are also a vital sector in development because they have tangible and non-tangible benefits (Mutaqin et al, 2023). The forest products industry has a good multiplayer effect on the economy (Firmansyah et al, 2019). The forest product industry is an important component of the Indonesian economy, although its contribution continues to decline (Sahara et al, 2022). The forestry product industry that continues to grow is the pulp and paper industry. The pulp and paper industry serves as a vital contributor to Indonesia's economy, particularly beyond the oil refining sector. (Kurniasih et al, 2020). As In Indonesia, it has a significant contribution in the world because it sources raw materials from plantation forests in Indonesia (Susilawati and Kanowski, 2020).
Apart from the positive contribution, pulp and paper companies use large amounts of energy and produce high emissions (Zhao et al, 2019). It is an industry that is in the top five largest energy-consuming industries with 6% of the energy used by industry (Del Rio, 2022). The substantial emissions generated by the pulp and paper industry have prompted several countries, including China, to enforce stringent regulations to control its environmental impact (Man et al, 2023). Carbon emissions produced by the industry originated from physical and chemical changes in raw materials (Shiyue, 2023). Reducing emissions requires a joint commitment from many countries so that the 2030 target can be achieved (Grassi et al, 2021). Indonesia has a target pledged in the Enhanced Nationally Determined Contribution (ENDC) with a reduction target of 32% voluntarily and 43.2% with international support (Republic of Indonesia, 2022).
Carbon emissions from the pulp and paper companies can be minimized through various approaches, including the implementation of Carbon Capture and Storage (CCS) technologies (Svenson et al, 2021), reducing the use of fossil fuels (Wang et al, 2016), using biofuels (Li et al, 2023) and regulatory arrangements that encourage technological change but still pay attention to competitiveness and investment (Söderholm et al, 2019). Apart from that, the financial sector through sustainable finance and green financing schemes can encourage emissions reduction (Zairis et al, 2024; Liu and Zhu, 2024). Market preferences can also change as public awareness of climate change and environmental sustainability issues increases (Fatica & Panzica, 2021).
Consumers and investors may prefer more environmentally friendly products and companies, thereby increasing pressure on mining companies to control their carbon footprint and adopt a more sustainable lifestyle (Rudianto et al, 2024). Risk classification is essential for identifying and categorizing the diverse risks encountered by financial institutions and investors engaged in commodity financing, particularly during the transition period toward a low-carbon economy, this also marks the climate change impacts in the mining sector (OJK, 2024). Risk classification enables more effective risk management by understanding the nature and sources of specific risks (Settembre-Blundo, 2021).
The financial sector plays a significant role in progressing toward a low carbon economy by using several financing instruments such as Sustainability Bonds (Vulturius et al., 2024) and Green Bonds (Flammer, 2021; L. Huang, 2024). Previous research stated that green finance reduces carbon emission intensity (Liu and Zhu, 2024). Financial instruments portfolio falls under the scope 3, indirect emission under category 15 Investment, also called Financed emission. Financed emission is often the primary source of emissions within the financial sector's portfolio (Fraser and Fiedler, 2023).
In 2022, The Partnership for Carbon Accounting Financials (PCAF) established the Global Standard for GHG Accounting and Reporting in the Financial Industry. The methodology provides a consistent approach to attributing financed emissions across various asset classes, including listed equity, corporate bonds, business loans, and mortgages (PCAF, 2022). PCAF is founded on the principle of the attribution factor, a fundamental concept that quantifies the proportion of a company's carbon emissions attributable to a financial institution's Scope 3 emissions (Teubler and Kühlert, 2020).
PCAF methodology aligns with international climate targets by enabling financial institutions to assess their carbon footprint, set reduction targets, and integrate climate considerations into decision-making (PCAF, 2022). With 578 institutions participating from all around the world, PCAF methodology has been applied at a total volume of $295,570 Million (PCAF, 2022).
It is crucial to address emissions in financial sector especially for the policymaker (Rizky et al, 2024). Previous research showed that a rising carbon footprint within the Indian banking sector, as reflected in a 9.4% increase in aggregate WACI. While financed emissions from public sector banks remained stable, private sector banks nearly doubled their exposure to carbon-intensive assets (Jindal et al., 2024).
Climate change has a broad impact reaching the small-scale industry and household level (Narayan et al, 2023). Expanding financial inclusion in areas characterized by high climate variability can facilitate the reallocation of resources from unproductive liquid assets toward investments in climate adaptation measures (Chhatre et al, 2023). Nowadays, Climate-related financial risks have significantly impacted banking sector. Physical climate risks and transition risks can substantially impact financial stability by contributing to the increasing of non-performing loans (NPL). Furthermore, it poses a threat to financial stability by reducing the quality of bank loan portfolios. The occurrence of stranded assets has the potential to disrupt the financial system because it increases the potential for credit risk due to lending from banks to fossil energy companies (Painter, 2020). This dynamic highlight the potential for climate change policies to influence the banking sector and impact on Indonesia’s financial system. The possibility of disruption to the financial system also has the potential to trigger a financial crisis caused by efforts to address climate change issues (Moretti et al., 2021). The expansion of the pulp and paper company is evident in the performance of sector-specific companies on the Indonesian Stock Exchange (Kurniasih et al, 2023). Therefore, the public, as shareholders and key stakeholders, holds significant influence in driving the reduction of carbon emissions within Indonesia's pulp and paper companies. Measuring carbon emissions by financial and stakeholders is very important to determine the impact of loans and investments provided by them (PCAF, 2022). Currently, no research has thoroughly examined the role of publicly owned shares in contributing to carbon emissions within Indonesia's pulp and paper companies. This study aims to address this gap by analyzing the carbon emissions associated with publicly traded shares of companies, additionally, in the pulp and paper sector listed on Indonesian Stock Exchange.
Research Methods
By using quantitative approach, the research employs a calculation methodology based on the financed emissions measurement framework issued by the PCAF for the listed company category. Under the PCAF methodology, a financial institution must account for the total carbon emissions of an invested company within its Scope 3 emissions, proportional to its attribution factor. This ensures a standardized approach to quantifying financed emissions. Furthermore, since an investor's outstanding holdings may vary throughout the year due to changes in investment levels, relying solely on the end-of-year holding amount may not accurately reflect the investment’s overall exposure. A more dynamic assessment is therefore necessary to capture fluctuations in financed emissions over time. Below are the following steps to measure financed emission using PCAF methodology:
1. Determining attribution factors. The attribution factor describes the size of the financing instrument compared to the value of the Company being financed so that it can be interpreted as the contribution of the financing instrument to the emissions produced by the company. The formula for the attribution factor is
The outstanding amount refers to the total number of shares sold in the current year, calculated based on Enterprise Value Including Cash (PCAF, 2022).
2. Determining financial emissions. Finance emissions are emissions contributed by financing instruments to a company. The financing instrument utilized in this research consists of shares from companies within the pulp and paper companies. The formula for Finance emissions is
The data used in this research is included in the tier 2 category, which means the data was obtained from publicly available data such as annual reports, sustainability reports, and other published reports. The data used is financial data, emissions, and sustainability data from the Company for 3 financial years from sample of companies, namely 2021, 2022 and 2023.
Population and sample
This research uses population for companies in the pulp and paper companies on the Indonesia Stock Exchange (BEI) Currently, there are 6 pulp and paper industries whose shares are listed on the IDX. The analysis will be carried out by taking sampling from the population using a purposive sampling method using extreme case sampling, which means the researcher chooses samples deliberately based on uniqueness or special considerations. In this study, the researcher chose the sample with special considerations: (a) Shares listed on the IDX are active, (b) Annual reports and sustainability reports are available which contain information on stock market value, market capitalization, Enterprise value including cash and company emissions. Samples will be given the acronyms A, B, C, D, E, and F with consideration of the company name confidential, but all data used can be accessed by the public.
This study utilizes data obtained from the Annual Reports (AR) and Sustainability Reports (SR) of the sample companies. All collected data represent the financial position at the end of the observed fiscal year. Currency conversion to USD is conducted using the Bank Indonesia middle exchange rate for the corresponding period.
The results of the analysis of the suitability of considerations with the pulp and paper company population can be observed in Table 1.
Results of population suitability analysis with sample consideration criteria
Based on the suitability of the samples in Table 1, the samples to be taken are Company A, which is in Riau and Banten, and Company B which is in East Java.
Results and Discussion
Sample profile
Company A
Company A is a paper company that is integrated with pulp processing which has 3 factory locations located in Riau Province and two factories located in Banten Province. Company A was established in 1976 and started issuing shares in 1990. Company A is associated with its raw material sources so that it can also affect carbon emissions from raw materials. As an industry that has been operating since 1976, the ability of the machine to produce large volumes of paper and the engine’s age will also affect the greenhouse gas emissions produced. Based on the 2023 Annual Report, Company A has a production capacity of 1.6 million tons of cultural paper, 3.1 million tons of pulp, 2.2 million tons of packaging, and 108 thousand tons of tissues. Company A shares have been registered on the Stock Exchange since July 16, 1990. As of quarter 4 of 2023, the number of Company A shares is 5,470,982,941 shares.
Company B
Company B is a paper company that has 1 factory located in East Java. Company B was established in 1972. As a company that was established more than 50 years ago and produces quite a lot of paper, Company B is required to make repairs and upgrades in its machines because it can affect the greenhouse gas emissions produced. Based on the 2023 annual report, Company B has a production capacity of 786,000 tons for industrial paper and 1,180,000 tons for cultural paper. Company B shares were registered on the Stock Exchange on April 3, 1990. As of quarter 4 2023, the number of Company B shares is 3,113,223,570 shares.
Attribution factor
The attribution factor figure shows the size of the portion of a financing instrument in the financing composition of a company. In this research, the instruments used are shares from Company A and B. The closer the number is to 1, the greater the share contribution to financing from the companies and the greater the share contribution to finance emissions. Attribution factor data, including total stock, can be observed in Table 2.
Attribution factors from Company A and B
The total stock of Company A tends to increase every year, whereas for Company B it fluctuates. Compared with Company B, Company A has a higher stock value, also, Company A stated a higher asset value than Company B. Meanwhile, for EVIC, the value continues to increase from year to year for both industries. In line with stock, Company A is overally bigger than Company B.
The attribution factor for Company A ranges from 0.31 to 0.33, which means that the portion of financing through shares in the company is around 31%–33% or one-third of the company value. This number is quite significant, considering that based on Company A share ownership data, 44.46% of the shares are owned by the public so more than 70% of the public's shares are obtained through shares. Thus, it can be interpreted as using the same percentage of carbon emissions contributed by financing through shares. The attribution factor for Company B is greater than Company A with a value range of 0.39–0.52. Thus, the share contribution to emissions produced by the paper Company using the attribution factor approach to finance emissions is greater in Company B than in Company A.
The findings emphasize the importance of equity financing in the company's overall financial framework and suggest that the institution's investment strategy could significantly influence both the firm's stability and market perception. The limitation on PCAF methodology lays on the data point being utilized, it is possible to use month to month data where possible to measure more precise dynamic of the finance emission (Atlason et al., 2023).
Finance emissions
The amount of finance emissions will be greatly influenced by the size of the attribution factor and company emissions. An explanation of attribution factors has been explained in the previous paragraph. Finance emissions will be influenced by the size of the company's emissions and also attribution factors. Using data from a published Sustainability report, Table 3 shows total emission from the companies as follows Fig. 1.
Total emission from Company A, B and C
Attribution factor for Company A and B.
Changes in investment levels can be seen in both Company A and B. Simultaneously, shifts in a company's market capitalization, debt levels, or financial structure influence its total enterprise value, thereby altering the attribution factor. Additionally, currency exchange rate fluctuations and macroeconomic conditions can affect valuation metrics, further contributing to year-to-year variations. These dynamic factors highlight the need for continuous assessment to ensure accurate and consistent tracking of financed emissions.
The emissions of companies A and B fluctuate each. Company A's company emissions range between 6,487,724 tCO2e – 6,844,866 tCO2e with finance emissions totaling 2,011,194 tCO2e – 2,258,806 tCO2e. Meanwhile, Company B's emissions range between 2,050,033 tCO2e – 2,417,840 tCO2e with finance emissions amounting to 840,514 tCO2e – 1,212,940 tCO2e. Company A's financial emissions are greater than Company B, this is because Company A's capacity and production volume are much greater (Fig. 2).
Comparison of total emission and financed emission Company A and Company B.
Based on finance emission data for Company A and B, shares have an important role in increasing carbon emissions or can play an important role upon managing carbon emissions, one of which is through the context of green finance. Green finance is an emerging financing approach that combines environmental protection with economic advantages, with a focus heavily lies on sustainable financial practices (Wang and Zhi, 2016). The implementation of green finance, including in share buying and selling activities, will further encourage market mechanisms oriented towards financial products that include carbon emissions management and prevent the impact of paper companies on the environment. In Indonesia itself, green finance has been initiated since the publication of the sustainable finance journey in Indonesia stage 1 during year 2015–2019 and is currently entering stage 2. Apart from that, the existence of a sustainability taxonomy which has been issued in 2024 provides guidance for stock investors to choose which sectors are included in the environmentally friendly category.
Conclusion
The pulp and paper industry not only plays a significant role in Indonesia’s economy but also contributes to mitigating carbon emissions. One of the important components in financing the pulp and paper companies is shares. One key indicator of the impact of stock ownership on emissions in the pulp and paper industry is the attribution factor, which can be as high as 0.52, as observed in Company B. This attribution factor figure can be an influential figure when calculating finance emissions in the pulp and paper company which can reach 2,258,806 tCO2e, this figure refers to Company B. Based on this research, the public as shareholders and can become controllers of the Company can imply an important role in managing emissions from pulp and paper sector in Indonesia.
The stock exchange regulator in Indonesia, as the authority overseeing share trading between issuing industries and the public, may consider implementing regulations that encourage listed companies to meet emission reduction obligations in alignment with Indonesia's Enhanced Nationally Determined Contribution (ENDC) targets. Similarly, the implementation of Carbon pricing policies set by the Government of the Republic of Indonesia could support efforts to reduce carbon emissions and greenhouse gases in the paper industry. However, these policies should also consider the purchasing power of consumers and the financial capacity of industries. This study has certain limitations, particularly in not accounting for consumer and industry purchasing power. Future research could further explore this topic by incorporating these variables.