Abstract
Strategic corporate responses to climate change and environmental challenges do not seem to be the primary domain of corporate management. In the short-run, such decisions are generally not consistent with executive incentives and often not seen as profit maximizing. Nevertheless, as some climate change responses may indeed be firm value maximizing, such decisions can be expected to reflect the nature of a firm’s corporate governance. Based on an analysis of 500 of the largest U.S. firms, we show empirically that this is indeed the case. Specifically, this study documents that institutional ownership and board entrenchment seem to significantly influence climate change and environmental impact mitigation policies of large firms.
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Notes
- 1.
Trucost, “Carbon Risks and Opportunities in the S&P 500”, June 2009. This disclosure failure poses significant challenges for corporate managers and board members and for policy makers as the analysis of the long-term impact of climate change on firm value is very difficult in the absence of good reliable data on GHG emissions.
- 2.
Stern Review: The Economics of Climate Change (2007).
- 3.
The estimate of 1% is taken from the Stern Review: Economics of Climate Change, 2007. The figure of 15% is a Goldman Sachs forecast assuming a high price for carbon at $150/ton. Also the Stern figure considers only mitigation costs, whereas the Goldman Sachs numbers reflect attempts to estimate the overall loss of firm value due to climate change.
- 4.
Extract of disclosure by Hersey Company to the Carbon Disclosure Project (2009).
- 5.
Excerpt from Wal-Mart’s disclosure to the Carbon Disclosure Project (2009).
- 6.
Yahoo and Google disclosures to the Carbon Disclosure Project (2009).
- 7.
For example, 29 states, Puerto Rico, and DC now mandate a minimum percentage of energy production (between 15 and 25%) from renewable sources generally by 2020.
- 8.
Ceres is a U.S. network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges.
- 9.
- 10.
GS Sustain, Goldman-Sachs Global Investment Research, May 2009, p.6.
- 11.
Wal-Mart’s disclosure to the Carbon Disclosure Project, 2009.
- 12.
Studies of the link between CSR and firm performance vary considerably in methodology. For example, some use the comparative performance of socially responsible mutual funds to conventional funds. Hamilton et al. (1993) and Statman (2000) do not detect performance differences between socially responsible funds and conventional funds. Screening for social responsibility is examined by Goldreyer and Ditz (1999). Their evidence does not suggest screening invokes better or poorer performance compared to conventional funds. Using meta-analysis, Orlitzky et al. (2003) draw broad conclusions based on examination of 52 CSR studies. They conclude that CSR programs are generally associated with higher or improved firm financial performance but the causality is unclear, suggesting that strong financial performance allows greater investment in CSR, which in turn leads to further enhancement of CSR policies. They also note that the benefits of CSR are reputational rather than being linked to concrete improvements in firm efficiency. However, recent work by Brammer et al. (2006) shows that CSR destroys shareholder value.
- 13.
Olsson (2007) examines the portfolio performance of a sample of U.S. firms from 2003 to 2006. He does not detect any significant difference in the risk-adjusted performance of low environmental risk compared to high environmental risk portfolios. Environmental risk rankings were based on summary statistics furnished by GES Investment Services. Derwall et al. (2005) study the link between environmental performance and Tobin’s Q. They report that strong environmental performers do not enjoy higher market valuation relative to their peers, but weak environmental performers appear to be penalized in terms of Q, relative to peers. Brammer et al. (2006) find that social responsibility in environmental issues is negatively correlated with stock returns.
- 14.
Trucost collaborated with Newsweek to produce a green ranking for 500 of the largest U.S. companies. Four summary environmental performance indicators were created from more than 700 environmental variables. Trucost has also produced a document “Carbon Risks and Opportunities in the S&P 500” (2009) that describes risk the risk exposure to carbon.
- 15.
Summary data were available at the Website. We purchased the full report to obtain greater detail.
- 16.
While our impact measure is a proxy for environmental action requiring expenditure, the policy variable could represent “green-washing” attempts. Preliminary evidence supplied by Goldman-Sachs’ GS Sustain Report (2009) suggests that firms seem far more willing to adopt policies rather than enact them, perhaps in an effort to enhance their green reputation.
- 17.
The sample of firms disclosing their greenhouse gas emissions is a subset of the larger sample of firms. We used the full set of firms to determine industry averages. Note that Q is not negative. We report industry-adjusted Q. Negative values reflect below industry average performance. Firms disclosing greenhouse gas exposure have below average industry-adjust Q.
- 18.
We estimate this elasticity by assuming all other dependent variables are measured at their mean values except that E-index equals either “1” or “6.”
- 19.
Since we use the square of institutional ownership the effect of changing the value of this variable is not linear.
- 20.
Regressions are estimated at mean values except institutional investment which varies from plus or minus one standard deviation (.21) from the average of .66. Recall that in the regressions the square of institutional investment is used.
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Aggarwal, R., Dow, S. (2013). Corporate Governance and Business Strategies for Climate Change and Environmental Mitigation. In: Cressy, R., Cumming, D., Mallin, C. (eds) Entrepreneurship, Finance, Governance and Ethics. Advances in Business Ethics Research, vol 3. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-3867-6_14
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