One of the most influential ideas in the past 30 years is the Efficient Markets Hypothesis, the idea that market prices incorporate all information rationally and instantaneously. However, the emerging discipline of behavioral economics and finance has challenged this hypothesis, arguing that markets are not rational, but are driven by fear and greed instead. Recent research in the cognitive neurosciences suggests that these two perspectives are opposite sides of the same coin. In this article I propose a new framework that reconciles market efficiency with behavioral alternatives by applying the principles of evolution – competition, adaptation, and natural selection – to financial interactions. By extending Herbert Simon’s notion of “satisficing” with evolutionary dynamics, I argue that much of what behavioralists cite as counterexamples to economic rationality – loss aversion, overconfidence, overreaction, mental accounting, and other behavioral biases – are, in fact, consistent with an evolutionary model of individuals adapting to a changing environment via simple heuristics. Despite the qualitative nature of this new paradigm, the Adaptive Markets Hypothesis offers a number of surprisingly concrete implications for the practice of portfolio management.

Does a shift to ambitious climate policy increase financial fragility? In this paper, we develop a quantitative macroeconomic model with carbon taxes and endogenous financial crises to study such “Climate Minsky Moments”. By reducing asset returns, an accelerated transition to net zero exerts deleveraging pressure on the financial sector, initially elevating the financial crisis probability substantially. However, carbon taxes improve long-run financial stability since permanently lower asset returns reduce the buildup of excessive leverage. Our findings point towards a positive net effect on financial stability if the long-run gains are not discounted too much.

In the recent years green bonds became a popular example of climate finance instruments. Although the volume of the green bond market has been increasing steadily in the last years, the actual impact of the “green label” on the market of bonds is still poorly understood. This article investigates the yield term structures of green and brown (standard) bonds from the same set of issuers in the US American municipal bonds market. We show that, although returns on brown bonds are on average higher than for green bonds, this spread can to a large extent be explained by properties of the respective issuing entity and the bond. The “green nature” of the bond rather seems to be penalized by the market, as green bonds are traded at lower prices/higher yield than would be expected by their credit profiles.

We estimate how the value of a hypothetical global equity index can be affected by physical climate damage for different degrees of aggressiveness of the abatement policy. We find that the magnitude of the difference in equity valuation with respect to a world without climate damages mainly depends i) on the aggressiveness of the abatement policy (the slower the abatement, the greater the difference); ii) on the presence of otherwise of tipping points with relatively low threshold temperatures; and iii) on the extent to which rates will decline in states of low consumption (of economic distress). The difference in equity valuations between a no-climate-damage world and a world with climate damages can be significant, ranging from a few percentage points to over 40% depending on the abatement policy, the nearness of tipping point, and the magnitude of the discounting effect. This leaves open the question of the extent to which these differences in valuation are already embedded in equity market prices. We argue that current valuations appear to imply either a very strong and effective abatement action, or that climate change will have a negligible effect on economic output. Since neither assumption should be considered a very likely scenario, we conclude that there is ample potential for equity revaluation.

Can environmentally-minded investors impact the cost of capital of green firms even when they invest through financial intermediaries? To answer this and related questions, I build an equilibrium intermediary asset pricing model with three investors, two risky assets, and a riskless bond. Specifically, two heterogeneous retail investors invest via a financial intermediary who decides on the portfolio allocation that she offers between a green and a brown equity. Both retail investors and the financial intermediary can tilt towards the green asset, beyond pure financial considerations. Perhaps surprisingly, the green retail investor can have significant impact on the pricing of green assets, even when she invests via an intermediary who does not tilt: a sizable green premium –that is, a lower cost of capital– can emerge on the equity of the green firm. This good news comes with important qualifications, however: the green retail investor has to take large leveraged positions in the portfolio offered by the intermediary, her strategy must be inherently state-dependent, and economic conditions or the specification of preferences can overturn or limit the result. When the financial intermediary decides (or is made) to tilt instead, the impact on the green premium is substantially larger, although it is largest when preference are aligned with retail investors. I also study what happens when the green retail investor does not know the weights in the portfolio offered by the intermediary, the potential impact of greenwashing, and the effect of portfolio constraints. Taken together, these findings highlight the central role that financial intermediaries can play in channeling financing (or not) towards the green transition.

This paper investigates issuance and possible design of sustainable bank debt instruments. While Sustainability Linked Bonds (SLBs) have seen substantial initial growth in the corporate industry, banks’ decision to issue debt linked to ESG targets needs to be weighed against regulatory requirements on loss absorbing capacity, subordination, and no incentives for early redemption. I extend and further develop a structural model of a bank which finances its assets with short-term deposits, equity and may choose to issue ESG linked subordinated and senior debt. I study the par yields of these instruments and mispricing of ESG targets based on different initial capital levels and bank incentives for risk taking.

A growing number of contributions in the literature have identified a puzzle in the European carbon allowance (EUA) market. Specifically, a persistent cost-of-carry spread (C-spread) over the risk-free rate has been observed. We are the first to explain the anomalous C-spread with the credit spread of the corporates involved in the emission trading scheme. We obtain statistical evidence that the C-spread is cointegrated with both this credit spread and the risk-free interest rate. This finding has a relevant policy implication: the most effective solution to solve the market anomaly is including the EUA in the list of European Central Bank eligible collateral for refinancing operations. This change in the ECB monetary policy operations would greatly benefit the carbon market and the EU green transition.

This paper investigates how financial markets perceive the long-term macroeconomic implications of the green transition in the Euro area, focusing on its expected effects on the natural rate of interest (r*). To capture transition dynamics, we identify carbon policy shocks from high-frequency reactions of EU Emissions Trading System futures to regulatory announcements. We then examine their effects on a market-based measure of r* that reflects investor expectations. Results show that markets anticipate an increase in r* following green policy shocks, but only temporarily. This disconnect from the persistent effect suggested by theoretical channels – such as higher productivity and reduced macroeconomic risk – points to a form of mispricing that may distort investment decisions, asset valuations, and perceptions of monetary policy space. It could also pose risks to financial stability if expectations were to abruptly realign with the structural changes induced by the green transition.

Climate change and the transition to a low-carbon economy to mitigate it engender significant economic costs. These costs are ultimately borne by households and firms, affecting their cash flows and wealth, which are key determinants of their credit worthiness. Climate-related costs are thus a source of credit risk. An accurate assessment of all credit risks, including climate credit risk, is central for creditors including central banks. If they underestimate it, they are exposed to financial losses and to the risk of holding assets of inadequate credit quality. Assessing climate risks requires methodologies based on forward-looking scenarios, on complex cause-and-effect linkages and on data that has not been observed in the past. Such models are at their infancy, but already offer meaningful insights. This note provides an overview of key components that such models are built on and illustrates them with examples of the analytics that are already available. It also applies one of the available methodologies to assess transition risk to the corporate bond holdings of the European Central Bank.

Keeping global warming under 1.5°C requires a complete phase-out of coal for electricity generation by 2040 according to the International Energy Agency’s Net Zero Emissions by 2050 (NZE) scenario. In this paper, we use unit-level data from the Global Coal Plant Tracker database to build a phase-out priority score and identify the coal-fired power plants that would need to be decommissioned now to comply with this pathway. We assume the other coal power plants continue to operate to the end of their lifetime. We show that 70% of the capacity of the operating coal fleet should be shut down now, which corresponds to stranded assets worth $842 billion globally. Replacing the coal capacities by equivalent low-carbon capacities would imply a much larger one-off cost of $4.5 trillion worldwide. This upfront investment would also imply large debt financing costs, estimated at $3.1 trillion globally, which would drive up the total cost to $8.4 trillion. But coal plants have much higher operational costs than low-carbon ones, in part because they need fuel to operate, and the cost of CO2 emissions need to be priced. We show that cumulated net operational gains linked to replacing coal plants with low-carbon alternative to comply with the 1.5°C would amount to $3.8 trillion worldwide, thus offsetting close to half of the total costs. By lowering financing costs and increasing carbon pricing in line with the International Energy Agency’s NZE scenario, the total equation could become positive, that is, total savings from the transition to clean energy would be higher than the total costs.

ESG ratings firms provide information to investors, analysts, and corporate managers about the relation between corporations and non-investor stakeholders interests. Recently, ESG ratings providers have come under scrutiny over concerns of the reliability of their assessments. In this Closer Look, we examine these concerns. We review the demand for ESG information, the stated objectives of ESG ratings providers, how ratings are determined, the evidence of what they achieve, and structural aspects of the industry that potentially influence ratings. Our purpose is to help companies, investors, and regulators better understand the use of ESG ratings and to highlight areas where they can improve. We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments. We ask: Why do ESG ratings often fail to meet their stated objectives? Is it due to methodological choices these firms make, or the sheer challenge of measuring a concept as broad and all-encompassing as “ESG?” Are fund managers properly motivated to ensure ESG ratings are reliable in predicting risk and performance? What steps do they take to validate ratings before using them? Despite their weaknesses, do ESG ratings have a role to play in reporting and compliance purposes? Would more expansive corporate disclosure improve the quality of ESG ratings? Is it even possible for companies to disclosure the vast number of stakeholder-related metrics that feed into ESG ratings? Should the SEC establish policies, procedures, and protections to reduce conflicts of interest and improve market confidence in the quality of ESG ratings?

We review existing machine learning models for estimating scope 1, 2, and 3 greenhouse gas emissions of companies using publicly available data, and propose a new interpretable approach, focusing on out-of-sample evaluation as well as on the data preprocessing steps such as outlier filtering, missing value imputation, and predictor selection. We suggest two frameworks: one without restrictions and another one with fewer inputs, better suited for small and mid-caps and for private companies.

During the first week of September, Iranian speedboats twice harassed U.S. Navy ships in international waters near the Strait of Hormuz. Those boats belonged to the Islamic Revolutionary Guard Corps (IRGC). In the same week, news emerged that the IRGC had arrested another dual Iranian-American national during a family visit to the country. The commander of the IRGC’s Quds Force, meanwhile, was in Aleppo, in the company of Iraqi Shiite militias currently engaged in the siege of Syria’s second-largest city. Indeed, only a few days earlier, the IRGC announced the formation of a Shiite liberation army composed of Shiite militias that Iran has been nurturing across Mesopotamia and the Levant. That did not stop France’s mobile phone giant, Orange, from beginning talks with Iran’s largest mobile phone operator, Mobile Telecommunication Company of Iran (MCI), over acquiring a stake in the Iranian company. The IRGC controls MCI through a 50-percent-plus-one stake in its parent company, the Telecommunication Company of Iran (TCI). In short, whether its internal security, foreign adventures, or large corporate ventures, the IRGC plays an outsized role in Iran’s internal power structure. Established in 1979 to consolidate the Islamic revolution and fight its enemies, the IRGC has evolved over the years into a full-fledged conventional army, conducting and directing terrorist activity abroad. The Guard has also become a political power broker, an economic conglomerate, and an agency in charge of nuclear and ballistic-missile proliferation. The interaction among military, economic, and political power is critical in understanding the centrality of the IRGC to Iran’s current system. The Guard exploits its influence and capabilities in one realm to increase its presence in another. Its growing economic clout is both an end in itself and a tool to advance its other agendas. Thus, IRGC revenues from economic activities yield the necessary resources and political leverage to place its members in positions of power. Conversely, the Guard’s political power serves the economic enterprises it owns, and both its political and economic weight in turn advance its military projects. The IRGC’s wealth serves three important goals. First, it generates revenue to finance the IRGC’s military activities – including the nuclear and ballistic missile programs at home and sponsorship of terrorism abroad. Second, it offers the Guard a network of companies, enterprises, banks, offices, holdings, and joint ventures that can execute the regime’s procurement efforts for advanced weaponry and sensitive technology. Third, it generates personal affluence, which the Guard can translate into political influence. Indeed, the Guard’s growing political and economic influence enables it to bank on public companies’ willingness to lend their services – both at home and abroad – to aid the Guard’s efforts to procure forbidden technologies and raw materials, and to finance their purchases through middlemen in foreign markets. Although the summer 2015 Joint Comprehensive Plan of Action (JCPOA) lifted significant sanctions on Iran, the risks for foreign investors – risks of exposure to money laundering, corruption, and terror finance or of inadvertently partnering with a still-sanctioned entity – have only increased. The Revolutionary Guard lies at the heart of these risks. The IRGC launders money from its “legitimate” businesses to fund its illicit activities; it finances terrorist groups across the world; and it enriches itself at the expense of the Iranian people through corruption and kleptocracy. It is for this reason, among others, that Transparency International ranks Iran 130 out of 168 counties on its corruption perception index, and the Basel Institute on Governance ranked Iran as worst in the world with regard to risks from money laundering and terrorism financing. This report demonstrates the Revolutionary Guard’s pervasive influence in the Iranian economy and provides an accounting of the IRGC’s nefarious activities. Without a sober understanding of how the IRGC will exploit economic dividends generated by the JCPOA, policymakers and the private sector cannot establish appropriate counter-measures to prevent the enrichment of the most dangerous elements of the Iranian regime.

The transparency around the inclination towards sustainability of institutional investors is becoming a double edge sword. This study provides empirical evidence that the non-financial corporations which provide information about the identity of the investors who subscribed their green and ESG bond issues are able, on average, to attract more shareholders than those with opaque bond holdings. It also shows that knowing the identity of a short list of large investors under the pressure of political sanctions have an impact on the decisions to trade of small institutional and retail investors. I use the announcement of the governor of Florida from July 27, 2022 about its intention to ban BlackRock, as well as the following anti-ESG events to identify which asset managers and financial institutions were blocked because of their environmental engagements. However, with a coverage spanning from September 2015 till the end of 2022, the empirical results reveal the shareholder base reshape of green issuers only in the early stage of the anti-ESG movement.

The paper exploits a panel quantile regression technique to uncover the asymmetric impact of material Environmental, Social, and governance (ESG) ratings on conditional quantiles of US corporate bond spreads. This work contributes to the literature by 1) comparing the ESG-bond spreads relationship between the heavily polluting sample (comprising of bonds belonging to heavily emitting companies) and the lightly polluting sample (comprising of bonds belonging to lightly emitting companies) 2) breaking down the effect of composite ESG ratings into effects of individual weighted pillars of ESG on bond spreads, 3) studying the impact of ESG on bond spreads across quantiles of bond spreads. The novel split-panel jackknife bias-correction approach has been employed to alleviate the bias arising from having a small T relative to N. Three main findings emerge from the analyses. First, improvements in ESG ratings lead to lower spreads due to the risk mitigation effect for brown firms. On the other hand, for green firms, ESG rating upgrades lead to higher spreads. Next, E pillar is the strongest pillar in determining the bond spreads of brown firms. All pillars E, S, and G pillars are important determinants of bond spreads for green firms. Lastly, improvements in ESG ratings are heterogeneous across quantiles.

The concept of portfolio alignment to a temperature trajectory has gained momentum among investors and regulators since the 2015 Paris Agreement recognized the importance of the financial sector for the low carbon energy transition. Yet, a clear definition and a transparent methodological framework for alignment assessment with a temperature trajectory, or portfolio temperature alignment, are presently lacking and few academic studies have addressed this question. This paper provides a definition of portfolio temperature alignment, reviews the key methodological steps in computing alignment measures, and highlights the main scientific challenges, with the aim to stimulate further research on this topic. We review, analyze and place in context the main findings of the recent technical review of portfolio temperature alignment assessment methodologies by Institut Louis Bachelier.

In this paper, we compare two mathematical approaches to measure financial portfolios climate performance. We focus on the individual financings (loans or investments) climate performances aggregation at the portfolio level question. To do so, two main weighting approaches could be used: portfolio weighting or activity weighting approaches. We used two techniques to compare the portfolio level climate performances steering easiness: a mathematical demonstration and a Monte Carlo simulation. The mathematical demonstration relies on the use of limited expansion of a function using Taylor-Young formula to model the impact of a small variation of input variables such as individual financings exposures and emission intensities on the portfolio’s average emission intensity. Comparing the inputs variation impacts expressions of the two aggregation approaches allows to compare the portfolio level climate performances steering easiness. The Monte Carlo simulation generalizes the conclusions of the mathematical demonstration to bigger variations of the input variables.

Stress tests are quantitative tools used by banking supervisors and central banks for assessing the soundness of the financial system in the event of extreme, but still plausible, shocks (macroeconomic stress tests). They are also an important management instrument for banks since they provide financial institutions with useful indications on the reliability of the internal systems designed for the measurement of risks (microeconomic or prudential stress tests). Under the new Basel Accord on banks’ capital adequacy the presence of sound stress testing methodologies is a prerequisite for the adoption of the advanced methods for the quantification of minimum capital requirements. Until the first half of 2007, the interest for stress testing had been circumscribed to practitioners, i.e., risk managers, central bankers and financial supervisors. Since then, the global financial system has been hit by deep turbulence’s and all major economies have been affected by high volatility in financial markets, deterioration of the value of portfolios, widespread repricing of risk and severe liquidity drying up. It has been pointed out that the severity of the crisis has been largely due to its unexpected nature and that a more extensive and rigorous use of stress testing methodologies would have probably contributed to alleviate the intensity and the repercussions of the turmoil. In such a context, stress tests have become a key issue in policy discussions and a regular subject for newspapers’ columnists. Notwithstanding the importance of the topic, books covering the different facets of macroeconomic stress testing are missing so far. While many articles have been published on specific issues and some textbooks deal with prudential stress tests, a systematic survey of methodologies and applications of macroeconomic stress testing is not available. This book aims at filling this gap, by providing practitioners and academics with a comprehensive and updated discussion of the theoretical underpinnings as well as the practical aspects of the implementation of such exercises. Prudential stress tests carried out by banks are not analysed in the book, even though it is not always practicable (and sensible) to distinguish them from macroeconomic stress tests. The book builds on the experience gained by the economists of many national and international financial authorities in their day-to-day surveillance activity. All the contributors have an extensive expertise in financial stability issues and stress testing methodologies. Obviously, due to space constraints some potential interesting applications may have been omitted. Nevertheless, the book – while not exhaustive – is wide-ranging and includes outstanding presentations of the most significant approaches as well as an inner description of the state-of-the-art in this field. While tailored for an expert readership, the book has the ambition to remain accessible to other readers, thanks to its plain language, clear explanation of the different issues, recurrent use of examples. The reader can either pick specific chapters of interest or easily move from simple to more complex topics as she progresses through the text.

Biodiversity loss poses significant risks to investment portfolios, yet these risks remain largely underexplored in financial decision-making. This paper highlights the need for the development and use of robust metrics to measure the impacts and dependencies of firms on biodiversity. We find that current approaches to measuring a firm’s impact on nature suffer from several shortcomings. These include incomplete data on firm activities, supply chains, and natural systems. In addition, many impact modeling and assessment methodologies are inconsistent, and in some cases, incoherent. There has been limited testing of the reliability of nature impact and dependency assessment tools in real-world investment settings. Finally, there is a lack of understanding among business and finance actors about how these tools work and how to interpret their outputs. We propose integrating spatially explicit and ecologically grounded metrics into firm valuation models to improve the assessment of biodiversity-related risks. This approach enables investors to identify underpriced risks and generate returns exceeding benchmark performance by aligning portfolios with sustainability goals. By bridging the gap between ecological science and finance, we provide actionable insights to reduce risks and thereby enhance portfolio performance while addressing critical biodiversity challenges.

The aim of this work is to propose an end-by-end modeling framework to evaluate the risk measures of a bank’s portfolio of collateralized loans in an economy subject to the climate transition. The economy, organized in sectors, is driven by a multidimensional Ornstein-Uhlenbeck (OU) productivity process while the climate transition is declined thanks to continuous deterministic carbon price and intensities processes. We thus derive the dynamics of macroeconomic variables for each scenario. By considering that a firm defaults if it is over-indebted, we define each loan’s loss at default as the difference between Exposure at Default (EAD) and the liquidated collateral, which will help us to define the Loss Given Default (LGD). We consider two types of collateral. First, if it is a financial asset (invoices, cash, or investments), we model the later by the continuous time version of the discounted cash flows methodology, where the cash flows growth is driven by the instantaneous output growth, the instantaneous growth of a carbon price function, and an arithmetic Brownian motion. Secondly, for physical asset (real estate, business equipment, or inventory), we focus on the example of a property in housing market. As in (Sopgoui 2024), a building price is the difference between the price of an equivalent efficient building following an exponential OU as well as the actualized renovation costs and the actualized future energy costs due to the inefficiency of the building, optimally determined by the carbon price process. Finally, we obtain expressions for risk measures of a portfolio of collateralized loans as a function of key climate transition parameters, such as carbon pricing and building energy efficiency. Banks will use these risk measures , depending on the climate transition scenarios, to define operating expenses, client fees, economic, and regulatory capital.

The erosion of natural capital linked with biodiversity loss and environmental degradation generates significant and long-term risks to society, the economy and therefore financial institutions (FIs). Today, nature risks are not priced into financial markets and are not accounted for in the scenarios used by financial institutions. We develop new stress testing and scenario approaches for nature-related financial risks needed to assess the macro- criticality of nature for financial institutions, and inform action by Central Banks and financial institutions, including a Nature Value at Risk (nVaR) metric. We develop a set of principles and a framework for assessing the macro-criticality of nature-related risks, supported by new research on risk transmission channels and an analysis of more than sixty historical analogues. The output is an inventory of almost eighty potential nature-related physical risk shocks (hazard-primary economic receptor pairs) that can form the basis to scenario development. We demonstrate how risks can be quantified for five potential risk dimensions (pollination, ground water, surface water, air quality and water quality (pollution)). Our preliminary analyses clearly demonstrate the macro-criticality of nature-related risks for society and the economy.

Using unique field-collected series of natural capital stock in Mexico dating back to the 1980s, this paper documents that large natural capital losses induce banks to reallocate their deposits supply, retrenching from environmentally distressed regions and investing in new deposit franchises in regions with a high agricultural productivity and a large natural capital endowment. For identification, we exploit bank branches’ indirect exposure to natural capital losses affecting their parent banks across regions. In the long run, this deposit reallocation leads to a further deterioration in natural capital. The results highlight that climate adaptation responses can be conditioned by a natural capital depletion spiral fueled by a reallocation of banks geographical presence.

This paper introduces a new measure of a firm’s negative impact on biodiversity, the corporate biodiversity footprint, and studies whether it is priced in an international sample of stocks. On average, the corporate biodiversity footprint does not explain the cross-section of returns between 2019 and 2022. However, a biodiversity footprint premium (higher returns for firms with larger footprints) began emerging in October 2021 after the Kunming Declaration, which capped the first part of the UN Biodiversity Conference (COP15). Consistent with this finding, stocks with large footprints lost value in the days after the Kunming Declaration. The launch of the Taskforce for Nature-related Financial Disclosures (TNFD) in June 2021 had a similar effect. These results indicate that investors have started to require a risk premium upon the prospect of, and uncertainty about, future regulation or litigation to preserve biodiversity.

In response to the challenge of biodiversity loss and climate change, understanding the socioeconomic and financial vulnerabilities stemming from the degradation of ecosystems is essential. This paper presents a novel method that integrates ecological and macroeconomic science to assess multidimensional socioeconomic nature-related risks at several geographical scales using readily available data. The approach combines socioeconomic and financial indicators with multi-sector cascading effects analysis and spatially-explicit assessments of economic activities and ecosystem threats in order to evaluate physical-related risks – arising from ecosystem dependency, and transition-related risks – associated with impacts on ecosystems. Through a case study on South Africa with a particular emphasis on water-related physical risks and land-use-related transition risks, we demonstrate the practical application of our method. We find, for instance, that 80% of South Africa’s net exports originate from activities exposed to water-related shocks and that 23% are generated by such activities situated in water-sensitive municipalities, thus considered as vulnerable to water scarcity. This integrated framework offers a valuable tool for strategic policy interventions aiming at reconciling ecological and economic objectives, and highlights the complementary roles of ecologists and economists’ knowledge in effectively addressing nature-related risks.

Combining new data on biodiversity-capacity and biodiversity-footprint with firm fundamentals, we conduct a causal analysis of the impact of biodiversity physical risk on firms’ profitability and stock returns. With this purpose, we build a biodiversity index for 35 countries and use a time series model to capture its variation over time. We show that such time trend estimation can be aggregated as risk exposure and can significantly forecast establishment-level profitability. We then show that the market underprices biodiversity physical risk, which is due to the insufficient analysis of related information and its impact on the firm-level future cash flow. We also document disparities of risk exposure across firms and sectors, and our results are consistent with previous findings in terms of climate physical risk.

Climate risk brings about a new type of financial risk that standard approaches to risk management are not adequate to handle. We develop a model that allows to compute the valuation adjustment of corporate and sovereign bonds conditioned to climate transition risk, based on available forward-looking knowledge on climate policy scenarios provided by climate economic models. We investigate the impact of the endogeneity and deep uncertainty of future scenarios on both the valuation of individual bonds and on standard risk metrics for a leveraged investor, considering the role of fossil fuels and carbon intensive activities in the economy of countries. We demonstrate that an investor’s Value at Risk andExpected Shortfall have low sensitivity to key parameters such as the Probability of Default(PD) of the bond In contrast, the investor’s PD is very sensitive to these parameters, and increases with the PD of the bond and with the probability of occurrence of the adverse climate transition scenario. Choosing the wrong scenario could lead to a massive underestimation of losses. Thus, Climate stress test exercises should allow for a wide enough sets of scenarios to avoid underestimation of losses. We apply the methodology to the AustrianNational Bank’s portfolio of sovereign bonds. In carbon intensive countries, the cost of climate misalignment is reflected in a higher Climate Spread and affects sovereign risk and portfolio’s performance. These results have important implications for the selection of relevant climate transition scenarios in climate stress-testing exercises, and for the assessment of climate-related financial risk for supervisory and prudential policy purposes.

Transition to a carbon-neutral economy is necessary to limit the negative impact of climate change and has become one of the world’s most urgent priorities. This paper assesses the impact of three potential transition pathways, differing in the timing and level of ambition of emissions’ reduction, and quantifies the associated investment needs, economic costs and financial risks for corporates, households and financial institutions in the euro area. Building on the first ECB top-down, economy-wide climate stress test, this paper contributes to the field of climate stress testing by introducing three key innovations. First, the design of three short-term transition scenarios that combine the transition paths developed by the Network for Greening the Financial System (NGFS) with macroeconomic projections that allow for the latest energy-related developments. Second, the introduction of granular sectoral dynamics and energy-specific considerations by country relevant to transition risk. Finally, this paper provides a comprehensive analysis of the impact of transition risk on the euro area private sector and on the financial system, using a granular dataset that combines climate, energy-related and financial information for millions of firms with the euro area credit register and securities database and country-level data on households. By comparing different transition scenarios, the results of the exercise show that acting immediately and decisively would provide significant benefits for the euro area economy and financial system, not only by maintaining the optimal net-zero emissions path (and therefore limiting the physical impact of climate change), but also by limiting financial risk. An accelerated transition to a carbon-neutral economy would be helpful to contain risks for financial institutions and would not generate financial stability concerns for the euro area, provided that firms and households could finance their green investments in an orderly manner. However, the heterogeneous results across economic sectors and banks suggest that more careful monitoring of certain entity subsets and of credit exposures will be required during the transition process.

The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating the market-based premium associated with carbon-transition risk in a cross-section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.

We study bank capital requirements as a tool to address climate-related financial risks and evaluate whether a prudential mandate for bank regulators remains appropriate in the presence of carbon externalities. We show that a prudential mandate maximizes welfare if carbon taxes are set optimally and fully characterize optimal capital requirements under such a mandate. Optimal transition-risk adjustments can crowd out clean lending. When carbon pricing is insufficient, using capital requirements to address externalities can require sacrificing financial stability or prove altogether ineffective. Capital requirements can play an indirect role by mitigating stranded asset risk, thereby making future carbon taxes credible.

This study examines the impact of droughts on the lending and deposit activities of US commercial banks, with a focus on agricultural lending. To this end, we combine geo-localized bank-level data with high-resolution drought indicators for the period 2000–2020. The findings of our econometric analysis reveal that severe drought conditions significantly reduced lending to the agricultural sector. This contraction was most pronounced in non-irrigated regions, while lending remained more resilient in areas with irrigation infrastructure, underscoring the stabilizing role of such investments. Single-county banks exhibited the sharpest reductions in agricultural lending compared to geographically diversified banks. Although federal aid programs implemented post-2012 partially mitigated the decline in credit provision to drought-affected areas, these measures did not fully offset broader contractions in banks’ loan books. Meanwhile, banks in drought-exposed regions experienced increases in deposits, with single-county banks exhibiting the strongest deposit inflows. However, post-2012, federal support measures reduced the need for banks to rely on competitive deposit rate adjustments to attract funds, leading to a decline in deposit rate incentives.

Because of the 2015 Paris Agreement, the development of ESG investing and the emergence of net zero emission policies, climate risk is certainly the most important topic and challenge for asset owners and managers now and will remain so over the next five years. It considerably changes portfolio allocation and the investment framework of both passive and active investors. The goal of this paper is to conduct a survey of the various climate risk measures that are available in the asset management industry and the practices of portfolio construction that use these metrics. Therefore, the first part of this paper lists the different climate risk metrics — e.g., carbon footprint, carbon transition pathway, carbon transition and physical risks. The second part is dedicated to portfolio optimization, in particular portfolio decarbonization and portfolio alignment (Paris-based benchmarks and net zero carbon objective). Among the different findings, two are of great importance for investors. First, portfolio decarbonization is more difficult when we include scope 3 carbon emissions. Indeed, optimizing using the sum of scopes 1, 2 and 3 emissions leads to a portfolio with more tracking error risk than using direct plus first tier indirect carbon emissions. Second, portfolio alignment is more complex than portfolio decarbonization. Since aligning portfolios with scope 3 is becoming the standard approach to climate portfolio construction, the impact on portfolio management may be substantial, and the divergence between carbon investing and traditional investing will increase.

This paper envisions climate linkers. We define climate linkers as long-dated financial instruments (bonds, swaps, and options) with payoffs indexed to climate-related variables, e.g., temperatures, sea levels, or carbon concentrations. On top of facilitating the sharing of long-term climate risks, another key benefit of these instruments would be informational, as their prices would reveal real-time market expectations regarding future climate. We develop and calibrate a sea-level-augmented integrated assessment model (IAM), and we exploit it to study climate-linked instruments’ cost and risk characteristics. We examine, in particular, climate risk premiums: because of the insurance provided by a bond indexed on sea levels (say), investors would demand a lower average return on such a bond than on conventional bonds. Our findings highlight the sensitivity of climate premiums to the assumptions regarding (i) the damages associated with temperature increases and (ii) feedback effects between temperatures and carbon emissions.

Asset owners and asset managers have a key role to play in the global transition towards a low-carbon economy, and their actions have been coming under increasing scrutiny by the public. Hence, methodologies to examine the alignment of assets with net zero trajectories are becoming a necessity for all investors. The question is how to build a net zero portfolio without incurring financial risks across different asset classes. New methodologies have been emerging for equity and corporate bond portfolios to gauge and manage these risks. They include common frameworks such as the EU Paris Aligned Benchmark and the EU Climate Transition Benchmark. However, no common framework has been developed yet for sovereign bonds. Nevertheless, sovereign bonds are one of the largest asset classes. It is thus paradoxical that there is very scarce literature available on sovereign portfolio net zero alignment. In our view, there is an urgent need to address this problem since governments now have the levers to influence all economic players to take environmental issues into account. In this paper, we propose an alignment framework for sovereign bond portfolios, comprising definitions, databases, metrics and models. We then apply our framework to a global universe.

This working paper was written by Peter Lau (Hong Kong Monetary Authority), Angela Sze (Hong Kong Monetary Authority), Wilson Wan (Hong Kong Monetary Authority) and Alfred Wong (Hong Kong Monetary Authority). Sadly, not much. This paper provides a theoretical and empirical analysis of the greenium, the price premium the investor pays for green bonds over conventional bonds. We explain in simple economic terms why the price premium of a green bond essentially represents a combination of the non-pecuniary environmental benefit of the bond, as perceived by the investor, and the effective cost of issuing it, as measured by the additional issuing costs of the bond netted off a range of monetary and non-monetary benefits associated with the issuance. Our empirical model decomposes the greenium into a time-varying market component which is common to all green bonds and an idiosyncratic component which is specific to a certain green bond itself. Using a global green bond dataset larger than any previous studies, we find that the greenium on average amounts to, sadly, just over one basis point. However, it can vary quite significantly among individual green bonds and our result suggests that a key factor underlying the variation is that they are subject to the risk of greenwashing to different extents.

We examine the impact of climate change on the pricing of corporate securities and on the capital structure of firms. The main transmission channel through which global warming has an impact is the stranding of assets upon liquidation. The predictions of our model are consistent with recent empirical evidence. Global warming has a profound impact on debt capacity and the optimal capital structure. We are the first to document a possible disciplinary effect. The higher the exposure, the lower the leverage, which interestingly does not necessarily lead to lower credit spreads. We disentangle the direct and indirect effects of global warming on credit risk management metrics and show how these effects complement each other and which effects dominate and when.

Do firms that report more carbon emissions – particularly scope 3 emissions – face a higher cost of borrowing in credit markets? In this paper, we find that firms that disclose scope 3 emissions face a lower cost of borrowing in credit markets and estimate a scope 3 disclosure premium of -20 basis points on average. However, credit markets do not significantly discriminate the quantitative amount of reported scope 3 emissions while penalizing scope 1 + 2 carbon generation. Is this trend because markets reward advertised rather than actual pollution reduction efforts – greenwashing – or because scope 3 data is not yet mature enough to provide reliable information? While the literature has documented evidence of investors rewarding greenwashing, we find substantial discrepancies in firms’ scope 3 disclosures across time, regions, and sectors. We show that these discrepancies are mainly concentrated in downstream data. Based on these findings, we highlight possible areas of engagement between firms and investors or policymakers that would be beneficial to all stakeholders.

Real estate—housing in particular—is a less profitable investment in the long run than previously thought. We hand-collect property-level financial data for the institutional real estate portfolios of four large Oxbridge colleges over the period 1901–1983. Gross income yields initially fluctuate around 5%, but then trend downward (upward) for agricultural and residential (commercial) real estate. Long-term real income growth rates are close to zero for all property types. Our findings imply annualized real total returns, net of costs, ranging from approximately 2.3% for residential to 4.5% for agricultural real estate.

Preventing the materialization of climate change is one of the main challenges of our time. The involvement of the financial sector is a fundamental pillar in this task, which has led to the emergence of a new field in the literature, climate finance. In turn, the use of Machine Learning (ML) as a tool to analyze climate finance is on the rise, due to the need to use big data to collect new climate-related information and model complex non-linear relationships. Considering the proliferation of articles in this field, and the potential for the use of ML, we propose a review of the academic literature to assess how ML is enabling climate finance to scale up. The main contribution of this paper is to provide a structure of application domains in a highly fragmented research field, aiming to spur further innovative work from ML experts. To pursue this objective, first we perform a systematic search of three scientific databases to assemble a corpus of relevant studies. Using topic modeling (Latent Dirichlet Allocation) we uncover representative thematic clusters. This allows us to statistically identify seven granular areas where ML is playing a significant role in climate finance literature: natural hazards, biodiversity, agricultural risk, carbon markets, energy economics, ESG factors & investing, and climate data. Second, we perform an analysis highlighting publication trends; and thirdly, we show a breakdown of ML methods applied by research area.

We analyse the level of potential carbon risk implied by alternative future climate policy sce- narios. To this end, we develop a novel climate credit risk model (CLIMACRED) for climate scenario-contingent valuation, linking the firm’s default probability to the climate scenarios developed by financial authorities. Transition risk emerges from changes in markets’ expectations about the materialization of climate transition scenarios, which lead to adjustments in the firms’ default probability and in the value of their corporate bonds. We derive closed-form expressions for the ad- justments in firms’ default probability considering asset-level technology, and for the value of issued bonds and equities. Our results show that valuation adjustments vary greatly with the severity of adjustments in market expectations, decarbonization scenarios and the energy technology composition of the firms’ revenues. Losses in equity values can range up to 80% for firms focusing on fossil fuel activities, but can be much lower for firms with diversified energy technology profiles.

This article proposes a novel approach to climate stress tests based on the stock-flow consistent approach. It analyses how financial instability can emerge due to technological displacement and asset stranding along Paris-compatible mitigation pathways. It develops a model for studying transition risks with an embedded financial system with bank and non-bank agents. It also features asset stranding as the decommissioning of excess high-carbon capital. It simulates decarbonisation pathways provided by Network for Greening the Financial System (NGFS). It banks on the different scenario variants featured in the NGFS scenario suite to explore related uncertainties. The model shows that more climate-ambitious and more constrained scenarios yield higher transition risks, both in the long and short run. It further shows that different financial institution types would not suffer equally from transition risks. Banks are overall little affected, while non-bank institutions can suffer from significant tensions, especially in delayed-action scenarios. The model also illustrates the importance of accounting for the financial sector’s reaction along decarbonisation paths. Finally, by studying decarbonisation trajectories from various integrated assessment frameworks, the model shows the necessity to consider many scenarios generated by different models. These results call for ambitious stabilisation policies to ensure a safe transition.

Climate stress testing has been developed these last years to shed light on the exposure and vulnerability of the financial system to climate-related risks. This paper offers a methodological review of the various climate stress tests that have been carried out by central banks and implemented by scholars. It attempts to answer the following question: are existing methodologies well-suited to assess the extent to which climate-related risks may induce financial risks and impair financial stability ? By comparing available methodologies, we discuss the choices that have been made by financial supervisors and outline further research avenues to help improve these methodologies. In particular, we show that focusing only on long-term frameworks with deterministic scenarios as encouraged so far by the Network for Greening the Financial System would lead to underestimating the financial risks caused by a disorderly transition. We propose complementary methodologies that would allow to assess the resistance of financial institutions to adverse climate-related risks scenarios and to guide them in financing the low-carbon transition.

We study the implications of climate change and the associated mitigation measures for optimal monetary policy in a canonical New Keynesian model with climate externalities. Provided they are set at their socially optimal level, carbon taxes pose no trade-offs for monetary policy: it is both feasible and optimal to fully stabilize inflation and the welfare-relevant output gap. More realistically, if carbon taxes are initially suboptimal, trade-offs arise between core and climate goals. These trade-offs however are resolved overwhelmingly in favor of price stability, even in scenarios of decades-long transitions to optimal carbon taxation. This reflects the untargeted, inefficient nature of (conventional) monetary policy as a climate instrument. In a model extension with financial frictions and central bank purchases of corporate bonds, we show that green tilting of purchases is optimal and accelerates the green transition. However, its effect on CO2 emissions and global temperatures is limited by the small size of eligible bonds’ spreads.

This working paper is written by Victor Leung (Hong Kong Monetary Authority), Wilson Wan (Hong Kong Monetary Authority) and Joe Wong (Hong Kong Monetary Authority). This study explores the “dark side” of the current development of corporate green bond markets. We document that greenwashing is not uncommon in global green bond markets, as some corporates are found to have no reduction in greenhouse gas emission intensities after their initial green bond issuance. Next, we find that to some extent, market participants are able to identify and penalise greenwashing firms, by making it more difficult or costly for them to re-issue green bonds. Finally, we show that the establishment of well-defined green bond taxonomies together with improvements in environmental disclosure requirements could further mitigate greenwashing behaviour, thereby fostering a healthier development of green bond markets.

A growing literature estimates the macroeconomic effect of weather using variations in annual country-level averages of temperature and precipitation. However, averages may not reveal the effects of extreme events that occur at a higher time frequency or higher spatial resolution. To address this issue, we rely on global daily weather measurements with a 30-km spatial resolution from 1979 to 2019 and construct 164 weather variables and their lags. We select a parsimonious subset of relevant weather variables using an algorithm based on the Least Absolute Shrinkage and Selection Operator. We also expand the literature by analyzing weather impacts on government revenue, expenditure, and debt, in addition to GDP per capita. We find that an increase in the occurrence of high temperatures and droughts reduce GDP, whereas more frequent mild temperatures have a positive impact. The share of GDP variations that is explained by weather as captured by the handful of our selected variables is much higher than what was previously implied by using annual temperature and precipitation averages. We also find evidence of counter-cyclical fiscal policies that mitigate adverse weather shocks, especially excessive or unusually low precipitation episodes.

Does it pay to invest in green companies? In countries where a market for carbon is functioning, such as those within the European Union, our findings suggest that it should be beneficial. Using a sample of green and brown European firms, we initially demonstrate that green companies have outperformed brown ones in recent times. Subsequently, we develop a production economy model in which brown firms acquire permits to emit carbon into the atmosphere. We find that the presence of a well-functioning carbon market could account for the green equity premium observed in our data. Incorporating a preference for green financial assets is also unlikely to overturn our results.

In the context of the transition to a low-carbon economy, the creditworthiness of banks’ corporate debtors may deteriorate due to a dual effect. First, the macro-financial environment may change due to coercive regulations and the resulting unavoidable higher investment costs, which indirectly affects the creditworthiness of companies. Second, costs paid directly by economic actors (e.g., the price of carbon) may reduce their short-term income and thus their ability to repay their debts. Both of these effects change the structure of credit conditions, defined in particular in the rating transition matrices, and subsequently affect the capital requirements of banks as defined in the Basel Accord. While banks already manage forward-looking macro-financial risks to meet regulatory stress testing exercises and are therefore already prepared to incorporate the indirect effect into their forward-looking credit risk management, the direct effect of sector-dependent climate transition costs requires new methodologies. In this paper, we propose a method to assess the effect of climate transition cost trajectories on transition matrices, taking into account the diffusion of risk across the geo-sectoral value chain defined with a Leontief input-output model. As an illustration, we apply our method to US transition matrices.

Understanding the allocation of bilateral aid for renewable energy projects helps to discern whether donor countries are driven by social and environmental objectives or by self-serving economic and strategic interests in the current energy transition’s geopolitical dynamics. Our analysis focuses on the factors influencing the distribution of official development aid for renewable energy (RE ODA) between 2009 and 2018, using OECD-CRS data. We consider donor and recipient characteristics, their interactions, and donor-donor strategic relationships, employing quantitative social network analysis and panel data models. This includes examining the technical, economic, and geopolitical motives behind aid allocation. By assessing the concentration of RE ODA and its significance in the recipient’s network, we uncover that political and strategic trade interests, particularly access to critical minerals and energy resources, largely determine the aid received by low-and-middle income countries. Interestingly, the specific needs of recipient countries are generally less influential in receiving RE ODA.

An extensive climate policy literature provides various recommendations for mitigating climate change, but these recommendations are not supported democratically, since the models employed consider either infinitely-lived individuals or normative social objectives (or both). In contrast, the present paper provides policy recommendations capable of incorporating democratic processes. I develop an overlapping generation model with political process micro-foundations and show how democratic climate policies are interconnected with other democratic policies. Time inconsistent social objectives combined with commitment issues lead to an inefficient tax on capital accumulation and a climate policy below the efficient level; while suppressing the tax on capital accumulation generates a climate policy even further below the efficient level. I derive a novel politico-economic Keynes-Ramsey rule for the market interest rate, which is useful for calculating the climate policy level. I show that individual pure time preference, individual altruism toward descendants, and young generation political power are key determinants of democratic climate policy ambition.

This paper assesses to what extent markets with sophisticated investors and large firms price transition risks due to climate policies. We introduce an important innovation to previous studies by examining the impact of climate policy on the allocation of capital in the syndicated loan market, using country-by-year continuous variation in climate policy stringency interacted with firm-level performance measures to isolate the effect of mitigation policies on loan spreads. We provide three main results. First, stringent climate policies significantly lower the cost of debt of firms with good environmental performance (in terms of emission intensity or patenting activity in mitigation technologies). Second, ESG scores and their environmental pillar – which correlate poorly with firms’ actual environmental outcomes – are not sufficiently informative to assess and price domestic climate policy risks. Third, more stringent mitigation policies can encourage investment in green firms by reducing the cost of debt.

During the 2008-2009 financial crisis, firms with high social capital, measured as corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High-CSR firms also experienced higher profitability, growth, and sales per employee relative to low-CSR firms, and they raised more debt. This evidence suggests that the trust between the firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock.

We study when firms choose to install boards and their roles in a historical setting where neither boards nor their duties are mandated by law. Boards arise in firms with large, heterogenous shareholder bases. We propose that an important role of boards is to mediate between heterogenous shareholders with divergent interests. Voting restrictions are common and ensure that boards are representative and not captured by large blockholders. Boards are given significant powers to both mediate and monitor management, and these roles are intrinsically linked.

This paper provides the first comprehensive study of mutual fund voting in proxy contests. Funds tend to vote against incumbent management at firms with weak operating and financial performance, and in favor of dissidents with credible track records. Passive funds are active monitors although they are more supportive of incumbent management than active funds. We document a positive selection effect: dissidents are more likely to initiate contests and proceed to voting when shareholders are expected to be more supportive based on observable and unobservable event characteristics as well as inherent pro-activist investor stance. Overall, institutional investors play a pivotal role in shaping the initiation and outcomes of proxy contests.

We use data from the U.S. airline industry to test the hypothesis, consistent with the general equilibrium oligopoly model of Azar and Vives (forthcoming), that inter-industry common ownership should be associated with lower prices in product markets. We find that, as the model predicts, increases over time in intra-industry common ownership are associated with higher prices, while increases in inter-industry common ownership are associated with lower prices. We also find that common ownership by the “Big Three” (BlackRock, Vanguard and State Street) is associated with lower airline prices, while common ownership by shareholders other than the Big Three is associated with higher prices. The results highlight the limitations of partial equilibrium oligopoly theory in the context of common ownership, and the need to consider a general equilibrium perspective.

We study the equilibrium effects of the “S” dimension of ESG under imperfect competition. ESG policies are pledges made by firms that constrain managers to treat their stakeholders better than market conditions alone dictate. Moderate policies limit market power and prompt managers to be more competitive; aggressive polices backfire, both for adopting firms and intended beneficiaries. In contrast to the “shareholder primacy” paradigm, competition in ESG policies under the “stakeholder capitalism” paradigm is a panacea for market power, delivering the first-best outcome in equilibrium. We discuss drivers behind the recent rise in ESG, ESG-linked compensation, and disclosure practices

Corporations have received growing criticism for their role in climate change, perpetuating racial and gender inequality, and other pressing social issues. In response to these concerns, shareholders are increasingly focusing on environmental, social, and corporate governance (ESG) criteria in selecting investments, and asset managers are responding by offering a growing number of ESG mutual funds. The flow of assets into ESG is one of the most dramatic trends in asset management. But are these funds giving investors what they promise? This question has attracted the attention of regulators, with the Department of Labor and the Securities and Exchange Commission (SEC) both taking steps to rein in ESG funds. The change in administration has created an opportunity to rethink these steps, but the rapid growth and evolution of the market means regulators are acting without a clear picture of ESG investing. We fill this gap by offering the most complete empirical overview of ESG mutual funds to date. Combining comprehensive data on mutual funds with proprietary data from the several of the most significant ESG ratings firms, we provide a unique picture of the current ESG environment with an eye to informing regulatory policy. We evaluate a number of criticisms of ESG funds made by academics and policymakers and find them lacking. We find that ESG funds offer their investors increased ESG exposure. They also vote their shares differently from non-ESG funds and are more supportive of ESG principles. Our analysis shows that they do so without increasing costs or reducing returns. We conclude that ESG funds generally offer investors a differentiated and competitive investment product that is consistent with their labeling. In short, we see no reason to single out ESG funds for special regulation.

We analyze how a profit-maximizing proxy advisor designs vote recommendations and research reports. The advisor benefits from producing informative, unbiased reports, but only partially informative recommendations, biased against the a priori likely alternative. Such recommendations induce close votes, increasing controversy, and thereby the relevance and value of proxy advice. Our results suggest shifting from an exclusive emphasis on recommendations, highlighting the importance of both reports and recommendations in proxy advisors’ information provision. They rationalize the one-size-fits-all approach and help reinterpret empirical patterns of voting behavior, suggesting that proxy advisors’ recommendations may not be a suitable benchmark for evaluating shareholders’ votes.

There is increasing interest in assessing the impact of climate policies on the value of financial sector assets, and consequently on financial stability. Prior studies either take a “black box” macro-financial approach or focus solely on equity instruments – though banks’ exposures predominantly consist of debt. We develop a more tractable finance (valuation) approach at the industry-level and use a Merton contingent claims model to assess the impact of a carbon tax shock on the market value of equity and debt instruments. We calibrate our model using detailed firm-level vulnerability data and apply the model to 2-digit sectoral exposures of Dutch banks. We find declines in the market value of banks’ assets of 3-14% of core capital for a €100 carbon tax shock, increasing to 9-32% for a €200 carbon tax shock.

This paper presents a nuanced exploration of the current economic models used by the European Commission, highlighting their required complements in the context of ecological transition policies in the European Union, such as the European Green Deal. It emphasises the need for and value of incorporating a broader range of complementary modelling tools and models that illuminate aspects often abstracted in conventional approaches. This would permit to anticipate more adequately the impacts of the environmental crisis, environmental policies and transition strategies, and to assess their economic consequences. The authors discuss the theoretical and operational challenges faced by current models (New Keynesian DSGE and EEE-CGE types) and suggest alternative empirical modelling approaches developed in academic and public institutions. The aim of this work is both to provide an exhaustive review of complementary operational models in collaboration with their research teams, and to prioritise model development and guide discussions towards more effective policy recommendations. By integrating additional and complementary models having comparative advantages in addressing specific policy questions, this paper argues that the inventory of modelling tools of the European Commission could be enhanced. This paper makes a case for a more diversified, holistic and robust approach to economic modelling, to make them more capable of supporting the design of efficient, feasible, fair and socially acceptable ecological transition strategies. It also calls for an institutional convergence and interdisciplinary dialogue between modelling teams to improve tools and to provide effective and systemic guidance to policymakers in the EU.

This paper proposes a set of short-term scenarios that reflect the diversity of climate transition shocks : increase in carbon and energy prices, increase in public or private investment in the lowcarbon transition, increase in the cost of capital due to uncertainty, deterioration of confidence, accelerated obsolescence of part of the installed capital, etc. Using a suite-of-model approach, we assess the implications of these scenarios for the dynamics of activity and inflation. By considering multiple scenarios, we therefore account for the uncertainty around future political decisions regarding climate change mitigation. The results show that the magnitude and duration of the macroeconomic effects of the transition to carbon neutrality will depend on the transition strategy chosen. While a number of short-term scenarios being inflationary or even stagflationary, there are also factors that could curb inflation and boost economic growth.

Green bonds allow firms to commit to climate-friendly projects. Equity investors react positively to their announcement. Based on prior empirical studies, we suggest that green bond commitments help managers signal the profitability of their green projects and that they do so because they are sensitive to their rm’s stock price. We present a signaling model in which firms undertake green projects not only because of carbon penalties but, additionally, because of managerial incentives, predicting that the role of the former is augmented by the latter. We test this prediction by exploiting both cross-industry differences in the stock-price sensitivity of managers’ pay and in stock share turnover, and cross-country variations in effective carbon prices. Our results not only support the role that our theory ascribes to managerial incentives, but also show that this role mainly depends on carbon pricing. Green bonds are not substitutes to carbon pricing. On the contrary, the latter is essential to the effectiveness of the former.

This paper contributes to an emerging literature aimed at uncovering the linkages between biodiversity loss and financial instability, by exploring biodiversity-related financial risks (BRFR) in France. We first build on previous studies and propose an analytical framework to understand BRFR, emphasizing the complexity involved and the limited substitutability of natural capital. We then provide quantitative estimates of dependencies and impacts of the French financial system on biodiversity. We find that 42% of the value of securities held by French financial institutions comes from issuers that are highly or very highly dependent on one or more ecosystem services. We also find that the accumulated terrestrial biodiversity footprint of these securities is comparable to the loss of at least 130,000 km2 of “pristine” nature, which corresponds to the complete artificialization of 24% of the area of metropolitan France. Finally, we suggest avenues for future research through which these estimates could feed into future assessments of physical and transition risks.

We study the preferential treatment of green bonds in the central bank collateral framework as an environmental policy instrument within a DSGE model with environmental and financial frictions. In the model, green and carbon-emitting conventional firms issue defaultable corporate bonds to banks that use them as collateral. The collateral premium associated to a relaxation in collateral policy induces firms to increase bond issuance, investment, leverage, and default risk. Collateral policy solves a trade-off between increasing collateral supply, adverse effects on firm risk-taking, and subsidizing green investment. Optimal collateral policy is characterized by modest preferential treatment, which increases the green investment share and reduces emissions. However, welfare gains fall well short of what can be achieved with optimal emission taxes. Moreover, due to elevated risk-taking of green firms, preferential treatment is a qualitatively imperfect substitute of Pigouvian taxation on emissions: if and only if the optimal emission tax can not be implemented, optimal collateral policy features a preferential treatment of green bonds.

We propose a strategy to build portfolios of sovereign securities with progressively declining carbon footprints. Passive investors could use it as a new Paris-consistent benchmark to construct a “net zero” (NZ) portfolio while tracking closely the risk-adjusted returns of a business-as-usual (BAU) benchmark. Our strategy rewards sovereign issuers that have made stronger efforts in reducing carbon intensity, measured by total domestic emissions per capita. The NZ portfolio would have reduced carbon intensity by 41% between 2014 and 2019, by assigning higher weights to countries that have had lower carbon emissions. Among advanced economies, rebalancing leads to raising shares of France, Italy and Spain in the portfolio at the expense of the United States. And among emerging market economies, this leads to higher shares for Chile, the Philippines and Romania at the expense of China. Importantly, the NZ portfolio retains the same creditworthiness as the BAU benchmark without entailing materially higher foreign exchange risks.

We study the impact of environmental risks on corporate bonds using a new extension of the Instrumented Principal Component Analysis model. In our model the alphas, factors, and risk exposures of returns can have either a purely financial or environmental connotation, depending on the company-specific characteristics they are function of. We find that environmental characteristics are not related to systematic factors, but, can be used to form an “anomaly” portfolio that significantly improves the investment-opportunity set when added to traditional bond or equity factors. We propose a simplified model justifying theoretically our empirical findings.

Despite widespread awareness of the detrimental impact of CO2 pollution on the world climate, countries vary widely in how they design and enforce environmental laws. Using novel microdata about multinational firms’ CO2 emissions across countries, we document that firms headquartered in countries with strict environmental policies perform their polluting activities abroad in countries with relatively weaker policies. These effects are largely driven by tightened environmental policies in home countries that incentivize firms to pollute abroad rather than lenient foreign policies that attract those firms. Although firms headquartered in countries with strict domestic environmental policies are more likely to export pollution to foreign countries, they nevertheless emit somewhat less overall CO2 globally.

As both demand and supply for information about companies’ sustainability performance continues to grow, many investors complain that the ESG data universe is getting too complex and confusing. Several studies have shown how rating agencies and data vendors display very little agreement on how to construct and use ESG measures. While commending these findings, we argue that only studying how data diverges is missing the insights of a more substantial question about the why of this divergence. Taking a lens of “social construction”, we thus set out to explore the differences between ESG measures as a function of (a) data vendors’ diverse social origins and (b) their necessity to create a unique profile in a maturing market. Examining five cases of eight interconnected ESG data vendors and rating agencies, we thus show how the origin of each company (their founding principles, legal status, purpose, etc.) strongly influences its conception of sustainability, definition of materiality, and by extension, the way ESG issues are measured and sold. We find that data vendors can be characterized into groups of value-vs values-based organizations, and that dynamics of consolidation on the ESG market and the mainstreaming of ESG data use are linked to a shift from values-to value-driven investors in the ESG space. Finally, the paper highlights pathways into a new ESG research agenda which explores the impact of the here examined origins of metrics.

This paper discusses the challenges of carbon-dioxide emission measurement on corporate credit portfolios. We illustrate how it can be difficult to translate traditional CO2 reductive strategies into incentives for portfolio managers. As an alternative approach to the footprinting techniques commonplace in equities, we introduce the ECOBAR model which looks at CO2 missions from an ordinal standpoint and takes a risk-based approach to measuring this in credit portfolios. We build out the model to encompass important credit alpha factors such as short positions, leverage and derivatives as well as explicit green investments such as green bonds. We apply the model on two sets of data, where the first is a historical real traded investment-grade credit portfolio and the second is a systematic CDS trading strategy. In the traded portfolio, we find that it has been possible to own a clearly CO2 efficient portfolio whilst still generating average alpha of 4.5 percentage points per annum. In the CDS-based strategy, alpha loss turns out to be insignificant with reasonable investment constraints on high-CO2 emitting issuers. We conclude that there is a good potential for low-CO2 strategies in a variety of operational, mainstream credit trading settings.

This paper presents a comprehensive framework for analyzing financial stress under scenarios with a disruptive transition to a low-carbon economy. This stress testing framework is designed to be readily applied by macroprudential supervisors or financial institutions. First, we construct stress scenarios using two dimensions: climate policy and energy technology. Then, we rely on various modeling approaches to derive macroeconomic and industry-specific implications. These approaches include a novel methodology for capturing industry-specific transition risks. Third, we disaggregate EUR 2.3 trillion in assets of more than 80 Dutch financial institutions by industry. Finally, our calculations show that financial losses can be sizeable, as portfolio values can decline by up to 11%. These outcomes suggest that climate-transition risks warrant close and timely attention from a financial stability perspective.

In order to meet the objectives set by the Paris Climate Agreement, global greenhouse gas emissions must be drastically reduced. One way to achieve this goal is to set an effective carbon price. Although beneficial for the climate, a rapid increase in this price can have a significant financial impact on corporate firms. Based on the 2018 Intergovernmental Panel on Climate Change (IPCC) scenarios, we study the credit risk sensitivity of 795 international companies. We develop a bottom-up approach and analyze how probabilities of default within each sector might evolve in both the medium (2023) and long term (2060). We find that energy, materials and utilities sectors would be the most affected. Moreover, the risk materializes earlier and is more heterogeneous for utilities. From a policy perspective, the prices associated with a scenario limiting global warming to 2°C have a limited impact on global credit risk. Such a scenario therefore seems achievable without generating substantial financial losses. From these results, we propose a new indicator, the carbon price threshold, that takes the economic and capital structure of the firm into account in measuring carbon risk.

We explore the conditions under which firms maintain their competitive advantage through sustainability-based differentiation when faced with imitation pressures by industry peers. We document growing intraindustry convergence on sustainability actions over time for almost all industries in our sample and show that interindustry heterogeneity in the rates of intraindustry convergence is associated with (a) the importance of environmental and social issues relative to governance issues, and (b) the tone and volume of feedback received from stakeholders. Further, we find that actions characterized by low regulatory uncertainty are more likely to be imitated whereas those characterized by high novelty are less likely to be imitated. We then distinguish between common (i.e., imitated) and unique sustainability actions and evidence that the adoption of unique actions is significantly and positively associated with multiple measures of performance, whereas the adoption of common actions is not. Overall, we explore the role of sustainability as a long-term strategy under conditions of strong imitative forces, contributing to both the sustainability and the imitation literatures.

Many institutional investors publicly commit to some form of responsible investment. This raises concerns about the credibility of such claims. We use participation in collaborative engagements to identify “Leaders”, i.e., institutional investors that are truly committed to improving firms’ sustainability outcomes. Despite owning only 2.2% of the average firm, Leaders alone explain the positive relationship between institutional ownership and firms’ environmental and social performance. In line with committed owners facilitating corporate change, engagement campaigns improve a targeted firm’s sustainable performance only when Leaders have a high ownership stake in the firm.

Companies are exposed to carbon-transition risk as the global economy transitions away from fossil fuels to renewable energy. We estimate the market-based premium associated with this transition risk at the firm level in a cross-section of over 14,400 firms in 77 countries. We find a widespread carbon premium—higher stock returns for companies with higher levels of carbon emissions (and higher annual changes)—in all sectors over three continents, Asia, Europe, and North America. Short-term transition risk is greater for firms located in countries with lower economic development, greater reliance on fossil energy, and less inclusive political systems. Long-term transition risk is higher in countries with stricter domestic, but not international, climate policies. However, transition risk cannot be explained by greater exposure to physical (or headline) risk. Yet, raising investor awareness about climate change amplifies the level of transition risk.

This paper aims to empirically investigate the impact of divestment. We focus on, the predominantly passive, Environmental, Social and Governance (ESG) Exchange Traded Fund (ETFs) divestment on firm level returns, cost of capital, ESG scores and carbon intensities. In total we identified and investigated 20,964 unique divestment events for the period from 2013 to 2022. Employing panel regression models, we show that divestment by these funds has a significant negative effect on the returns of individual companies over two years following. More coordination, that is multiple ETFs divesting simultaneously, leads to stronger effects. Further, coordinated divestment by these ESG ETFs increases subsequent firm cost of capital, both debt and equity, and lowers subsequent firm carbon emission intensities and after a 8 quarter delay increases ESG scores, on average. These results provide further evidence that divestment, particularly coordinated divestment, is an important tool for the sustainability transition.

We examine whether the sustainable character of an investment impacts asset prices in experimental asset markets. We use asset markets with the structure introduced by Smith, Suchanek, and Williams (1988) to investigate the impact of positive, neutral, and negative sustainability attributes. Prior studies suggest that investors experience positive emotions when choosing a sustainable investment and that positive emotions correlate with purchases and overpricing. Our design allows for simultaneous observations of both phenomena and we find that sustainability positively influences asset prices through the channels of preferences and emotions, which we measure using face-reading software. Moreover, the fraction of female traders increases overpricing given that the asset is sustainable.

Motivated by concerns that mutual funds’ stated integration of environmental, social and governance (ESG) criteria in investing is cosmetic, we study the widespread phenomenon that mutual funds change their name to include ESG-related appellations. Using a unique global sample of 740 ESG-related name changes between July 2016 and September 2022, we investigate investors’ response and fund managers’ behaviour in terms of fund flows, portfolio-level ESG metrics, portfolio turnover, and fees. Using difference-in-differences analysis and accounting for heterogeneous treatment effects, we provide mixed evidence on whether funds increase flows by renaming, although effects appear significant for funds domiciled in Europe. We subsequently document that fund managers do improve the ESG performance, reduce exposure to controversial businesses, decrease the carbon intensity, and lower the overall ESG risks of their portfolios after ESG renaming. Repurposing has no material impact on funds’ turnover rates and on fees. The results alleviate concerns that funds use ESG-oriented name changes cosmetically and imply that they are renaming with purpose.

Firms are increasingly announcing targets to reduce their carbon emissions, but it is unclear whether firms are held accountable for these targets. Here we examine emissions targets that ended in 2020 to investigate the final target outcomes, the transparency of target outcomes and potential consequences for missed emissions targets. A total of 1,041 firms had emissions targets ending in 2020, of which 88 (9%) failed and 320 (31%) disappeared. We find limited accountability and low awareness of the target outcomes. Only three of the failed firms are covered by the media. After a firm fails its 2020 emissions target, we do not observe significant market reaction, changes in media sentiment, environmental scores and environment-related shareholder proposals. In contrast, initial announcements of these 2020 emissions targets are rewarded with significant improvements in media sentiment and environmental scores. Our findings raise concerns for the accountability of emissions targets ending in 2030 and 2050. The previous version of the paper was titled ‘Accountability of corporate emissions reduction targets.’ Not Available for Download Add Paper to My Library Share: Limited Accountability and Awareness of Corporate Emissions Target Outcomes Nature Climate Change, 2025 [10.1038/s41558-024-02236-3] Posted: 16 Jan 2024 Last revised: 23 Jan 2025 Xiaoyan Jiang New York University (NYU) – Department of Accounting Shawn Kim University of California, Berkeley – Haas School of Business Shirley Lu Harvard University – Business School (HBS) Date Written: December 27, 2023 Abstract Firms are increasingly announcing targets to reduce their carbon emissions, but it is unclear whether firms are held accountable for these targets. The previous version of the paper was titled ‘Accountability of corporate emissions reduction targets.’ Keywords: Emissions reduction target, decarbonization, climate change, accountability JEL Classification: Q54, M14, M41, G14 Suggested Citation: Jiang, Xiaoyan and Kim, Shawn and Lu, Shirley, Limited Accountability and Awareness of Corporate Emissions Target Outcomes (December 27, 2023). Nature Climate Change, 2025 [10.1038/s41558-024-02236-3], Available at SSRN: https://ssrn.com/abstract=4676649 or http://dx.doi.org/10.2139/ssrn.4676649 Not Available for Download 0 References Fetch References 0 Citations Fetch Citations Do you have a job opening that you would like to promote on SSRN? Place Job Opening

The ESG convenience yield in auto loan securitizations rose from 0.03% in 2017 to 0.54% in 2022. Consumers financing vehicles through captive lenders benefit from lower borrowing costs. However, the focus on ESG scores also lowers the cost of capital for high-emissions vehicles. ESG funds allocate more capital to securitizations from issuers with high ESG scores even when they finance high-emissions vehicles. A model of subjective beliefs in which investors heuristically infer CO2 emissions from ESG scores can explain the observed effects. These findings suggest that ESG investing affects real quantities but does not raise the cost of emitting CO2.

This paper examines how exposure to extreme weather events affects earnings forecasts of equity analysts, using a unique dataset that matches natural disasters with the location of analysts across the US over 2000-2020. I find that analysts’ earnings forecasts become more accurate after they experience an extreme weather event. This effect is more pronounced for firms with high climate risks, greater asymmetric information, and for analysts who are more experienced. These results indicate that weather events prompt analysts to rationally acquire and incorporate more information into their forecasts.

Institutional ownership of U.S. corporations has increased ten-fold since 1950. We examine whether these new concentrated owners influence portfolio firms’ political activities, as a window into the larger question of whether institutional investors can wield their control to extract benefits from portfolio firms. We find that after the acquisition of a large stake, a firm’s political action committee (PAC) giving mirrors more closely that of the acquiring investment management company (in our preferred specification, a 31 percent increase in comovement). This pattern is observed for acquisitions driven by new index inclusions, which suggests that our findings result from a causal effect of acquisitions rather than other correlated shifts in political agendas. We argue that investors drive the convergence in giving – the effects are driven by more “partisan” investors, and we show that firms shift their giving more around acquisitions than investors do. Overall, our findings suggest that corporations’ political business strategies are likely dictated by broader considerations than simple profit, and modeling corporate influence should take into account how corporations are governed.

The paper studies a natural experiment in responsible investment conducted by the Japanese Government Pension Investment Fund (GPIF). In 2018 GPIF gave its largest passive manager a remunerated mandate to engage with portfolio companies to improve ESG and adopted best-in-class indexes, rewarding high ESG score companies with additional equity investment. Using private data and difference-in-differences analysis we show that engagement by the asset manager has improved scores. In an event study, we find that the conditional portfolio tilt significantly impacts share prices. We also provide evidence that ESG scores for Japan increased significantly more than for companies in other countries.

The performances of the emerging equity markets vis a vis their matured counterparts in the developed world have shown repeated reversals in recent times; in the pre-Mexican crisis period (1990-1994), most of the emerging markets performed much better compared to the matured markets in terms of both return and associated risk, while the pattern reversed during 1995-2001 (a period affected by the Asian crisis). In the recent past emerging markets (those of Asia and Latin America, in particular) have shown a remarkable recovery, in terms of both the level of return and risk, while the matured markets have experienced drop in return and rise in risk. Such reversals of market performances make foreign equity investment extremely volatile and may have a destabilizing effect on the domestic economy of the recipient country. It is therefore prudent to evolve appropriate built-in mechanisms in these economies such that destabilization and damages can be minimized in case foreign investors suddenly withdraw from the equity market. It is in this context that a careful examination of the nature of foreign institutional investment (FII) flow into an economy may help identify, the strength of various factors likely to affect such flows, and also, the possible impact of such flows on the performance of the equity market concerned. Over the past decade India has gradually emerged as an important destination of global investors’ investment in emerging equity markets. In this paper we explore the relationship of foreign institutional investment (FII) flows to the Indian equity market with its possible covariates based on a time series of daily data for the period January, 1999 to May, 2002. Here we try to identify the relevant covariates of FII flows into and out of the Indian equity market and also to determine the nature of causality between the relevant variables. We incorporate into the analysis variables that appear, a priori, to be the primary determinants of global investors’ demand/supply for/of stocks in the Indian market. The set of possible covariates considered comprises two types of variables. The first type includes variables reflecting daily market return and its volatility (representing risk) in domestic and international equity markets, based on the BSE Sensex, S&P 500 and the MSCI WI, as well as measures of co-movement of returns in these markets (the relevant betas). The second type of variables, on the other hand, are essentially macroeconomic ones like daily returns on the Rupee-Dollar exchange rate, short run interest rate and index of industrial production (IIP); variables that are likely to affect foreign investors’ expectation about returns in the Indian equity market. The data set embodies day to day variations and hence, is better suited for examination of various interrelationships, including Granger causality for equity market operations that are typically short run issues. Also, we relate daily FII flows first to the variables mentioned above (distinguishing between three kinds of flows, namely, FII flows into the country or FII purchases, FII flows out of the country or FII sales and the net FII inflows into the country or FII net) and later modify the model specification to include a short past history of the variables over different time frames, like a week or fortnight. Our results show that, though there is a general perception that FII activities exert a strong demonstration effect and thus drive the domestic stock market in India, evidence from causality tests suggests that FII flows to and from the Indian market tend to be caused by return in the domestic equity market and not the other way round. The regression analysis, in various stages, reveals that returns in the Indian equity market is indeed an important (and perhaps the single most important) factor that influences FII flows into the country. While, the dependence of net FII flows on daily return in the domestic equity market (at a lag, to be more specific) is suggestive of foreign investors’ return-chasing behaviour, the recent history of market return and its volatility in international and domestic stock markets have some significant effect as well. However, while FII sale (and FII net inflow) is significantly affected by the performance of the Indian equity market, FII purchase is not responsive to this market performance. Looking at the role of the beta’s of the Indian market with respect to the S&P 500 and MSCI indices it is concluded that foreign institutional investors do not seem to use the Indian equity market for the purpose of diversification of their investments. It is also seen that return from exchange rate variation and fundamentals of the Indian economy may have some influence on FII decisions, but such influence does not seem to be strong, and finally, daily FII flows are highly autocorrelated and this autocorrelation can not be accounted for by all or some of the covariates considered in our study. Policy implications that emerge are that a move towards a more liberalised regime, in the emerging market economies like India, should be accompanied by further improvements in the regulatory system of the financial sector. To fully reap the benefits of capital market integration, in India (and other countries having thin and shallow equity markets) the prime focus should be on regaining investors’ confidence in the equity market so as to strengthen the domestic investor base of the market, which in turn could act as a built-in cushion against possible destabilizing effects of sudden reversal of foreign inflows.

Due to the embrace of modern portfolio theory, most of the stock market is controlled by institutional investors holding broadly diversified economy-mirroring portfolios. Recent scholarship has revealed the anti-competitive incentives that arise when a firm’s largest shareholders own similarly sized stakes in the firm’s industry competitors. This Article expands the consideration of the effects of common ownership from the industry level to the market-portfolio level, and argues that diversified investors should rationally be motivated to internalize intra-portfolio negative externalities. This portfolio perspective can explain the increasing climate change related activism of institutional investors, who have applied coordinated shareholder power to pressure fossil fuel producers into substantially reducing greenhouse gas emissions. While institutional investors have protested their ability to influence firm-level supply and pricing decisions in the service of muting competition, they are more willing to advertise their role in seeking emissions reduction commitments, even admitting they are for the benefit of portfolio returns. These commitments, however, affect product supply and imply market power in much the same way, and provide further evidence that institutional investors are able to influence managerial decisions at the firm level for the benefit of their broader portfolio. This insight requires the amendment of the traditional view that diversified investors are “rationally reticent” and lack the incentive to engage in monitoring of firm behavior. It additionally challenges a fundamental norm of corporate governance law: the theory of shareholder primacy rests on the premise that shareholders homogeneously seek to maximize corporate profits and share value. This Article shows that in certain circumstances a majority of minority shareholders may direct the firm away from a profit-maximizing objective.

This paper studies institutional investors’ decision-making using novel data from a major proxy advisor. We highlight the significant role of customized proxy advice in shaping shareholders’ voting decisions. About 80% of funds receive customized advice, and custom recommendations differ substantially from benchmark recommendations. We show that customization plays two key roles. First, it helps shareholders express their ideologies through the vote. Second, it facilitates shareholders’ decision-making process by reducing the need to pay attention to every proposal individually and enabling focus on the more important proposals. Customization thus influences both the aggregation of preferences and the aggregation of information in voting outcomes. Our findings offer a new perspective on the role of proxy advisors and suggest a shift away from solely focusing on benchmark recommendations.

This paper examines fundraising by ESG startups in the private market. It first explores how startups’ ESG characteristics influence investors’ investment decisions using a real-stakes placement experiment with real US venture capitalists (VC) and linking their experimental behaviors to their real-world portfolio data. While the experiment reveals VCs’ non-pecuniary motivation in impact investing, it finds that VCs perceive ESG startups as less profitable, especially when evaluating high-quality startups. This profitability concern dominates profit-driven VCs’ decisions, leading to lower interest in contacting ESG startups. To assess the accuracy of VCs’ expectations of ESG startups’ profitability, an outcome test shows that ESG startups exhibit superior post-funding performance. A complementary survey with real VCs further shows that the biased expectations mainly arise from an expectation extrapolation channel and a lack of information on ESG startups. Lastly, through a dynamic Bayesian model, the paper further illustrates how VCs’ financial concerns and expectations might evolve and adversely influence the fundraising outcomes of ESG startups in a venture capital staged-financing setting. This paper provides the first empirical evidence that investors’ bias against ESG startups can dampen the fundraising efforts of these startups in the private market.

This study examines whether the sovereign credit market incorporates expectations of coastal flooding and sea level rise (SLR). The results indicate that medium- and long-term credit default swap spreads increase for sovereigns with a substantial portion of their population vulnerable to ex-ante coastal flooding in response to news around climate summits. Predictability tests suggest that the market asynchronously incorporates changing vulnerabilities of regions into its risk assessment with such news, consistent with theories of inattention to information. A real-options model is used to consider debt financing trade-offs associated with sovereign inaction or investment into adaptation.

In the last decade, companies have come under pressure to be socially conscious and environmentally responsible, with the pressure coming sometimes from politicians, regulators and interest groups, and sometimes from investors. The argument that corporate managers should replace their singular focus on shareholders with a broader vision, where they also serve other stakeholders, including customers, employees and society, has found a receptive audience with corporate CEOs and institutional investors. The pitch that companies should focus on “doing good” is sweetened with the promise that it will also be good for their bottom line and for shareholders. In this paper, we build a framework for value that will allow us to examine how being socially responsible can manifest in the tangible ingredients of value and look at the evidence for whether being socially responsible is creating value for companies and for investors.

We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom, 1991), few impact funds tie compensation directly to impact, and most retain traditional financial incentives. However, funds contract directly on impact in other ways and adjust aspects of the contracts like governance. In the cross-section of impact funds, those with higher profit goals contract more tightly around both goals.

We explore the predictive relation between high-frequency investor sentiment and stock market returns. Our results are based on a proprietary dataset of high-frequency investor sentiment, which is computed based on a comprehensive textual analysis of sources from news wires, internet news sources, and social media. We find substantial evidence that intraday S&P 500 index returns are predictable using lagged half-hour investor sentiment. The predictability is evident based on both in-sample and out-of-sample statistical metrics. We document that this sentiment effect is independent of the intraday momentum effect, which is based on lagged half-hour returns. While the intraday momentum effect only exists in the last half hour, the sentiment effect persists in at least the last two hours of a trading day. From an investment perspective, high-frequency investor sentiment also appears to have significant economic value when evaluated with market timing trading strategies.

Since 2008, a massive shift has occurred from active towards passive investment strategies. The passive index fund industry is dominated by BlackRock, Vanguard, and State Street, which we call the ‘Big Three’. We comprehensively map the ownership of the Big Three in the United States and find that together they constitute the largest shareholder in 88 percent of the S&P500 firms. In contrast to active funds, the Big Three hold relatively illiquid and permanent ownership positions. This has led to opposing views on incentives and possibilities to actively exert shareholder power. Some argue passive investors have little shareholder power because they cannot ‘exit’, while others point out this gives them stronger incentives to actively influence corporations. Through an analysis of proxy vote records we find that the Big Three do utilize coordinated voting strategies and hence follow a centralized corporate governance strategy. However, they generally vote with management, except at director (re-)elections. Moreover, the Big Three may exert ‘hidden power’ through two channels: First, via private engagements with the management of invested companies; and second, because company executives could be prone to internalizing the objectives of the Big Three. We discuss how this development entails new forms of financial risk.

We conjecture that board renewal mechanisms—those substantive enough to renew the thinking of the board—are required before investors can address the mismatch between their preferences regarding environmental sustainability and what insiders at firms are actually doing. We identify the adoption of majority voting for directors and the introduction of a female director as two corporate governance mechanisms potentially strong enough to renew a board’s thinking on sustainability. Using a sample of 3,293 firms from 41 countries, along with quasi-exogenous shocks to board renewal mechanisms in Canada and France, we find that both board renewal mechanisms are associated with significantly higher future environmental performance. Further tests provide suggestive evidence that board renewal is more strongly associated with environmental performance in settings with better institutions and more motivated institutional investors. These results suggest the importance of board renewal for alignment of firm policies with investor preferences around the world.

Empirical stylized facts in the literature concerning “sin” versus “angel” stocks display asymmetry. Through an experiment, we examine whether such biases can be micro- founded via individuals’ preferences and belief formations. We find that negative environmental and social externalities have thrice the impact of positive externalities on investment choices. Further, negative externalities modestly increase pessimism about investment prospects while positive externalities have no discernible impact. The asymmetry is pervasive, heterogeneous, and comparable to the magnitude observed in loss-aversion. Beyond rationalizing stylized empirical facts, our findings should help direct the growing theoretical literature that models the implications of non-pecuniary individual investor behavior.

The presentation slides in this document provide an overview of our study, The Illusory Promise of Stakeholder Governance, which will be published by the Cornell Law Review in December 2020. Corporate purpose is now the focus of a fundamental and heated debate, with rapidly growing support for the proposition that corporations should move from shareholder value maximization to “stakeholder governance” and “stakeholder capitalism.” Our study critically examines the increasingly influential “stakeholderism” view, according to which corporate leaders should give weight not only to the interests of shareholders but also to those of all other corporate constituencies (including employees, customers, suppliers, and the environment). We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. We conclude that this view should be rejected, including by those who care deeply about the welfare of stakeholders. Stakeholderism, we demonstrate, would not benefit stakeholders as its supporters claim. To examine the expected consequences of stakeholderism, we analyze the incentives of corporate leaders, empirically investigate whether they have in the past used their discretion to protect stakeholders, and examine whether recent commitments to adopt stakeholderism can be expected to bring about a meaningful change. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. Furthermore, we show that embracing stakeholderism could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously. The document is based on presentations slides we prepared for various presentations of our study, including at the University of Chicago, Columbia Law School, Harvard Law School, the Big Debate on Stakeholder Capitalism at Oxford, and the ECGI-Stockholm Conference on Sustainable Finance. Our study on The Illusory Promise of Stakeholder Governance is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Another part of this research project is For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

Is climate change partisanship reflected in residential decisions? Comparing individual properties in the same zip code with similar elevation and proximity to the coast, houses exposed to sea level rise (SLR) are increasingly more likely to be owned by Republicans and less likely to be owned by Democrats. We find a partisan residency gap for even moderately SLR exposed properties of more than 5 percentage points, which has more than doubled over the past six years. Findings are unchanged controlling flexibly for other individual demographics and a variety of granular property characteristics, including the value of the home. Residential sorting manifests among owners regardless of occupancy, but not among renters, and is driven by long-run SLR exposure but not current flood risk. Anticipatory sorting on climate change suggests that households that are most likely to vote against climate friendly policies and least likely to adapt may ultimately bear the burden of climate change.

Carbon markets have become a popular tool to regulate emissions. By putting a price on carbon, cap-and-trade schemes reshape incentives faced by firms, encouraging them to emit less, and bringing the world closer to reaching the ambitious climate goals outlined in the Paris Agreement. Understanding the strategies of the firms that are subject to the new regulations is essential for maximizing the effectiveness of these schemes. In particular, do the firms under the emission trading schemes engage in lobbying to shape the regulation to their advantage? Second, do all market participants oppose the regulation that increases their production costs? This paper addresses these questions by focusing on the case of the European Union Emissions Trading System (EU ETS) – the largest cap-and-trade program in the world. This work utilizes firm-specific lobbying, carbon intensity, and financial data for the population of the EU ETS firms during 2013-2017, and investigates the determinants of the political action of firms and their support for the EU ETS. The study hypothesizes that the two decisions depend on the cost considerations and on the competitive dynamics. Large firms with higher carbon intensities, that face greater regulatory costs, are more likely to lobby on the EU ETS. Furthermore, firms that may gain a competitive advantage due to regulation, that is firms with lower carbon intensities that operate in concentrated markets, will be more likely to lobby in favor of the EU ETS. Empirical analysis confirms the presence of these two dynamics, contributing to the research on climate lobbying and informing the design of the climate policy compensation mechanisms.

This paper first sets a definition of corporate social responsibility (CSR) as an extended model of corporate governance and then accounts for a voluntary approach to CSR, meant as voluntary compliance with CSR strategic management standards, in terms of an economic theory of self-regulation based on the concepts of social contract, reputation and reciprocal conformism. The paper argues that extended fiduciary duties toward all the firm’s stakeholders are needed because of the same neo-institutional analysis of the firm that justifies it as a unified system of governance of economic transactions based on authority relations and residual rights of control. The key concept here is that of abuse of firm’s authority vis-a-vis the stakeholders who hold incomplete contracts with the firm. Extended fiduciary duties are singled out from the model of a Social Contract amongst the firm’s stakeholders. This provide for a clear cut and calculable criterion of strategic management no less able to set a bottom-line to the firm management than the profit maximisation principle, while being able of answering legitimate claims of fair treatment from all the firm’s stakeholders. Such a task is accomplished by an application of the theory of bargaining games to the Social Contract of the firm, which employs the Nash-Harsanyi bargaining solution as a normative criterion for strategic management and corporate governance, providing an answer to the deficit of uniqueness problem raised by Michael Jensen (2001) against the notion of stakeholders value. Then, the paper distinguishes two models of self regulation (the discretionary one, and the explicit-norms-cum-self-enforcement one) and argues that while incomplete contracts and imperfect knowledge debar form resorting to reputation effects in order to support discretional self-regulation, on the contrary an explicit standard for CSR strategic management, based on general and abstract business ethics principles and precautionary protocols and rules of behaviour – both publicly shared by stakeholders and firms through social dialog – make possible to put again at work the reputation mechanism inducing endogenous incentives of compliance with a voluntary standard. The paper here suggests how (by both fuzzy logic and default reasoning) a CSR Strategic Management Standard may work as a cognitive gap filling tool with respect to the firm’s commitments and the stakeholders’ expectations in presence of incomplete information. Moreover recent developments in the theory of conformist non-purely-self-interested preferences add motivational force to the basic result about self-enforcement of a CSR management standard. Hence, conformist preferences solve the problem of optimal mixed strategies that otherwise could enable the firm inducing the stakeholders to “trust” it without really conforming to a CSR standard. This result is given a formal proof in sec.11. The paper concludes with a collusion-proof design of intermediate social bodies (civil society institutions) that may answer the demand for assurance and external verifiability of CSR standards compliance by independent third.

To address growing concerns about the negative effects of corporations on their stakeholders, supporters of stakeholder governance (“stakeholderism”) advocate a governance model that encourages and relies on corporate leaders to serve the interests of stakeholders and not only those of shareholders. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. Stakeholderism, we conclude, is an inadequate and substantially counterproductive approach to addressing stakeholder concerns. To assess the promise of stakeholderism to protect stakeholders, we analyze the full array of incentives facing corporate leaders; empirically investigate whether they have in the past used discretion to protect stakeholders; and show that recent commitments to stakeholderism were mostly for show rather than a reflection of plans to improve the treatment of stakeholders. Our analysis indicates that, because corporate leaders have strong incentives not to protect stakeholders beyond what would serve shareholder value, acceptance of stakeholderism should not be expected to produce material benefits for stakeholders. Furthermore, we show that acceptance of stakeholderism could well impose major costs. By making corporate leaders less accountable and more insulated from shareholder oversight, acceptance of stakeholderism would increase slack and hurt performance, reducing the economic pie available to shareholders and stakeholders. In addition, and importantly, by raising illusory hopes that corporate leaders would on their own protect stakeholders, acceptance of stakeholderism would impede or delay reforms that could bring real, meaningful protection to stakeholders. The illusory promise of stakeholderism should not be allowed to advance a managerialist agenda and to obscure the critical need for external interventions to protect stakeholders via legislation, regulation, and policy design. Stakeholderism should be rejected, including and especially by those who take stakeholder interests seriously. Presentation slides for this paper are available on SSRN here. This paper is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Other parts of this research project include Will Corporations Deliver Value to All Stakeholders? by by Lucian A. Bebchuk and Roberto Tallarita, For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita, Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, and How Twitter Pushed Stakeholders Under The Bus by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo.

We conduct in-depth interviews of senior executives representing over 20% of the market capitalization of the U.S. equity market to understand: (i) the importance, antecedents and consequences of corporate culture; (ii) the mechanisms that underlie the creation and effectiveness of corporate culture; as well as (iii) the factors that deter a firm from achieving its aspirational culture. Our interviews provide the following insights. First, executives characterize culture as “a beliefs system,” “a coordination mechanism,” and “an invisible hand.” Second, most executives view culture as one of the top three factors that affect their firm’s value. Cultural fit in M&A deals is so important that most executives would walk away from a target that is a cultural misalignment. Third, culture is primarily set by the current CEO. Fourth, boards do not directly choose the firm’s culture; instead, they influence the choice of culture by picking the CEO and through their influence on specific policies like incentive compensation, hiring, firing, and promotion decisions, and the values the finance function embraces. Fifth, executives emphasize that for a firm’s culture to be effective, the firm’s espoused values must be backed up by actual behavior and norms. Sixth, an effective culture improves firm value and profitability by (i) fostering creativity and encouraging productivity; (ii) promoting more risk tolerance; (iii) mitigating myopic behavior; (iv) creating a climate for suggesting critiques and for allowing ideas to germinate organically; and (v) by compensating for mistakes in ways that the firm’s assets cannot. In addition to the above, executives suggest several sources of publicly available data to measure corporate culture. See our related paper Corporate Culture: Evidence from the Field.

Given the large variations in the evolution and the size of the responsible investing (RI) mutual fund sectors across countries, we examine the factors affecting the growth driven by retail and institutional investors. We find that the size of a country’s RI fund industry, whether measured relative to the size of the conventional fund industry or measured relative to the country’s GDP, is strongly related to the country’s cultural norms, as measured by Hofstede, World Values Survey, or GLOBE. The RI sector also increases with the country’s wealth, as measured by the GDP per capita.

To understand better when, how and why employees react to CSR, we devised a two-part study. the first part involved a series of in-depth interviews and eight focus groups with employees of a major consumer-goods company, followed by a global employee survey (10,000-plus responses) administered by the company itself. Each focus group comprised five to eight participants at various locations, including the company’s U.S. headquarters, a manufacturing plant, a regional sales office and one non-U.S. location. The second part featured a series of interviews followed by two online surveys of employees (yielding 481 responses) from more than 10 companies in the manufacturing, retail and service sectors. (Details of the study methodology are available from the authors on request.) The data from these primary research studies, viewed through the clarifying lens of our general research program, provided valuable insights into the challenges and opportunities facing companies that want to deploy their CSR efforts strategically in the war for talent.

To address growing concerns about the negative effects of corporations on their stakeholders, supporters of stakeholder governance (“stakeholderism”) advocate a governance model that encourages and relies on corporate leaders to serve the interests of stakeholders and not only those of shareholders. We conduct a conceptual, economic, and empirical analysis of stakeholderism and its expected consequences. Stakeholderism, we conclude, is an inadequate and substantially counterproductive approach to addressing stakeholder concerns. To assess the promise of stakeholderism to protect stakeholders, we analyze the full array of incentives facing corporate leaders; empirically investigate whether they have in the past used discretion to protect stakeholders; and show that recent commitments to stakeholderism were mostly for show rather than a reflection of plans to improve the treatment of stakeholders. Our analysis indicates that, because corporate leaders have strong incentives not to protect stakeholders beyond what would serve shareholder value, acceptance of stakeholderism should not be expected to produce material benefits for stakeholders. Furthermore, we show that acceptance of stakeholderism could well impose major costs. By making corporate leaders less accountable and more insulated from shareholder oversight, acceptance of stakeholderism would increase slack and hurt performance, reducing the economic pie available to shareholders and stakeholders. In addition, and importantly, by raising illusory hopes that corporate leaders would on their own protect stakeholders, acceptance of stakeholderism would impede or delay reforms that could bring real, meaningful protection to stakeholders. The illusory promise of stakeholderism should not be allowed to advance a managerialist agenda and to obscure the critical need for external interventions to protect stakeholders via legislation, regulation, and policy design. Stakeholderism should be rejected, including and especially by those who take stakeholder interests seriously. Presentation slides for this paper are available on SSRN here. This paper is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Other parts of this research project include Will Corporations Deliver Value to All Stakeholders? by by Lucian A. Bebchuk and Roberto Tallarita, For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, The Perils and Questionable Promise of ESG-Based Compensation by Lucian A. Bebchuk and Roberto Tallarita, Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, and How Twitter Pushed Stakeholders Under The Bus by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo.

This teaching case explores how a real estate private equity firm responds to the growing financial risks of climate events. Centered on a fictional CEO, Jonathan Hayes, and his firm Selwyn Investment Holdings, the teaching case presents a realistic and data-driven decision-making process as climate-related physical risks—like flooding and hurricanes—begin to materially impact asset financial performance and insurance costs. With pressure from investors, regulators, and shifting market expectations, the firm’s management team must evaluate how to assess, price, and mitigate climate risks across their portfolio. The case introduces students to cutting-edge climate risk assessment tools, the ASTM Property Resilience Assessment (PRA) framework, and evolving practices in incorporating climate risks in underwriting and insurance. Through the lens of a key investment decision regarding a high-risk Florida retail property, the case illustrates the intersection of real estate finance, climate science, adaptation strategies, and uncertainty in decision-making. This case is designed for use in graduate courses (like Master in Real Estate and MBA) or executive education courses on real estate, sustainability, climate risk, or ESG strategy. It aims to (1) equip students with the knowledge foundation for incorporating climate risk into real estate investment decisions, in particular, the PRA framework and analytical skills; (2) highlight challenges of stakeholder engagement and consensus-building under climate risks, engineering and financial uncertainty; and (3) foster debate over proactive versus reactive strategies in a rapidly evolving climate risk and resilience landscape.

This paper frames a normative theory of stewardship engagement by large institutional investors and asset managers in terms of their theory of investment management – “Modern Portfolio Theory” — which describes investors as attentive to both systematic risk as well as expected returns. Because investors want to maximize risk-adjusted returns, it will serve their interests for asset managers to support and sometimes advance shareholder initiatives that will reduce systematic risk. “Systematic Stewardship” provides an approach to “ESG” matters that serves both investor welfare and social welfare and fits the business model of large diversified funds, especially index funds. The analysis also shows why it is generally unwise for such funds to pursue stewardship that consists of firm-specific performance focused engagement: Gains (if any) will be substantially “idiosyncratic,” precisely the kind of risks that diversification minimizes. Instead asset managers should seek to mitigate systematic risk, which most notably would include climate change risk, financial stability risk, and social stability risk. This portfolio approach follows the already-established pattern of assets managers’ pursuit of corporate governance measures that may increase returns across the portfolio if even not maximizing for particular firms. Systematic Stewardship does not raise the concerns of the “common ownership” critique, because the channel by which systematic risk reduction improves risk-adjusted portfolio returns is to avoid harm across the entire economy that would damage the interests of employees and consumers as well as shareholders.

Is shareholder activism on environmental and social issues driven by a quest for shareholder value maximisation or do sponsors of environmental and social proposals use this channel to advance ulterior motives? I address this question from a new angle by using the industry-specific materiality standards by the Sustainability Accounting Standards Board (SASB) to classify the environmental and social proposals into financially material or immaterial for the target firm. Overall, the results indicate that a considerable amount of investor resources is spent on advancing immaterial environmental and social issues through shareholder activism. Based on a sample of 3,360 environmental and social proposals, I find that more than 56% of the submitted proposals focus on financially immaterial matters. While certain investors such as public pension funds, university and foundation endowments, religious institutions and specific asset managers are better at targeting financially material issues, the overall shareholder base does not seem to differentiate between the financial materiality, or otherwise, of a proposal. Material proposals neither receive greater vote support nor does the market react more positively to learning that a company has been targeted by a material proposal. Finally, my results suggest that companies are more likely to be targeted if they show past violations and concerns on material environmental and social issues.

Socially responsible investing (SRI) is gaining traction in the financial sector, but it is unclear whether the dominant financial logic complements or competes with the social logic in the founding of SRI funds. Based on insights we gained from observation at an Asian SRI industry association, interviews with SRI professionals in the U.S. and Europe, and other fieldwork, we questioned explanations for SRI’s conflicted relationship with the financial logic. Our observations prompted us to build a panel database of SRI fund foundings from 1970 to 2014 in 19 countries so that we could examine how a dominant logic interacts with alternative logics to promote or stifle institutional change. We decomposed the financial logic into interdependent dimensions as the provider of means (resources, practices, and knowledge) for novel financial ventures to be founded and the enforcer of profit-maximizing ends that constrain such foundings. Our theory suggests a paradoxical role for the financial logic, which explains an intriguing empirical finding: the founding of SRI funds has a curvilinear, inverted-U-shaped relationship with the prevalence of the financial logic. We propose and find that the relationship between the dominant financial logic and the social logic of SRI shifts from complementary to competing as the financial logic becomes more prevalent in society and its profit-maximizing end becomes taken for granted. We examined how certain alternative logicsthose of unions, religion, and green political parties-moderate these effects. Our results shed light on how and to what extent institutional change can occur in fields in which one institutional logic is dominant. They also reveal countrylevel institutional factors that drive SRI.

Do depositors react to negative non-financial information about their banks? By using branch level data for the United States, I show that banks, that financed the highly controversial Dakota Access Pipeline, experienced significant decreases in deposit growth, especially in branches located closest to the pipeline. These effects were greater for branches located in environmentally or socially conscious counties, and data suggests that savings banks were among the main beneficiaries of this depositor movement. Using a global hand-collected dataset on tax evasion, corruption, and environmental scandals related to banks, I show that negative deposit growth as a reaction to scandals is a widespread phenomenon.

We draw on new data and theory to examine how private market contracts adapt to serve multiple goals, particularly the social-benefit goals that impact funds add to their financial goals. Counter to the intuition from multitasking models (Holmstrom and Milgrom, 1991), few impact funds tie compensation directly to impact, and most retain traditional financial incentives. However, funds contract directly on impact in other ways and adjust aspects of the contracts like governance. In the cross-section of impact funds, those with higher profit goals contract more tightly around both goals.

Using a time-varying measure of firm-level temperature sensitivity, we examine the relation between temperature changes and firm performance. We find that firms with a higher temperature sensitivity have lower future profitability and riskier corporate policies. These firms are also overpriced as they earn lower average future returns. Market participants potentially contribute to the mispricing. Nonlocal institutional investors allocate higher portfolio weights to high temperature sensitivity firms and sell-side equity analysts issue less accurate forecasts for these firms. Together, these results suggest that financial markets under-react to firm-specific information about temperature changes, which generates predictable patterns in returns. A trading strategy that exploits this mispricing generates an annualized risk-adjusted return of over 4% during the 1968-2020 period.

Korean Abstract: 최근 전 세계적으로 ESG, 즉 환경(Environment), 사회(Society), 지배구조(Governance)에 관심이 급증하면서 이에 대한 논의가 활발히 이루어지고 있다. ESG는 근본적으로 투자자들을 위한 투자지침이나, 기업 경영전략의 개념을 넘어서 인류 공동체의 지속가능한 번영을 위한 가치체계를 현실세계에 실천하려는 의지로 이해할 수 있다. 또 지속가능한 발전을 위해 사회의 다양한 이해관계를 포용해야 한다는 철학을 반영한다. ESG 문제는 오늘날 사회경제 공동체가 직면하는 현실 전반에서 점점 더 직접적인 위협요인으로 작용하는 동시에 성장 및 문제해결의 기회로서 다방면에 걸쳐 활발히 탐구되고 있다. 이러한 관점에서 본 보고서는 ESG의 개념 및 적용 범위를 확장하여 투자나 기업경영뿐만 아니라 국가정책 및 제도 사례를 포함한 글로벌 ESG 동향을 파악하고, 효율성, 공정성, 그리고 지속가능성 측면에서 ESG 국가전략을 통합적으로 설계ᆞ실행하는 방안에 대해 논의한다. 제2장에서는 ESG 개념이 어떻게 발전하고 확산되었는지 살펴본다. 그동안 경제ᆞ경영 분야의 이념적 기초를 제공한 주주자본주의는 경제적 번영을 추구하는 과정에서 경제발전의 토대가 되는 자연환경과 사회 공동체를 훼손하는 여러 부작용에 적절히 대응하지 못하였다. 1980년대 초부터 국제사회는 현재의 경제적 발전이 미래세대의 경제적 번영을 훼손하지 않도록 하는 지속가능발전에 대해 논의를 시작하였다. 처음에는 환경 이슈에서 시작하여 점차 인권과 사회적 가치를 포함하는 방향으로 논의가 확대되었으며, 근래에는 환경, 사회, 기업지배구조라는 세 가지 측면을 포괄하는 ESG 개념으로 정리되었다. 제3장에서는 ESG 경영전략을 추구한 대표적인 기업 사례를 소개한다. ESG에 관심이 높은 주요국들의 경우 ESG 활동에 선도적인 기업이 많으며, 그 양상도 다양하다. 파타고니아와 같이 설립 초기부터 성장 과정 내내 꾸준히 ESG 활동을 추진해 온 기업들도 있지만, 대다수 기업은 사회의 ESG 관심 증가에 부합하여 ESG 활동수준을 높이는 행태를 보였다. 유니레버와 같이 기존 사업방식에 ESG 경영을 반영하는 경우도 있으나, 슈나이더일렉트릭, CLP그룹, 외르스테드 등 기존 사업을 폐기하고 ESG 개념에 적합한 사업을 시작하는 등 전면적인 사업재편에 나선 기업들도 발견된다. 한국기업들도 근래에 ESG 활동을 늘려가고 있으며, 특히 환경 관련 분야에서 적극적인 모습을 보이고 있다. 한편 지배주주가 경영권을 행사하는 것이 일반적인 한국적 상황에서 기업지배구조 관련 ESG 문제는 한국기업에 중대한 위협요소인 동시에 기회요인이 될 것으로 보인다. 제4장에서는 기업 차원을 넘어 ESG 국가전략의 필요성을 탐구한다. 일반적으로 국가정책 개입의 정당성은 시장실패(market failure) 현상에서 발견된다. 그러나 ‘정부실패(government failure)’라는 용어도 있듯 많은 정책이 부작용을 낳거나 비효율적인 것으로 판명되기도 한다. 결국 시장과 정부의 역할분담은 효율성 기준에 따라야 하며, ‘시장이냐 정부냐’의 이분법적 구분이 아닌 ‘시장과 정부’의 협조 내지 공조 프레임이 모색되어야 한다. 인공지능이나 빅데이터 등 근래의 정보통신 기술의 눈부신 발전과 첨단 금융수단, 그리고 다양한 조직 및 경영기법 등을 참고할 때, 기존의 정부정책 개입 영역을 재조정하고 그 방식 역시 혁신적으로 다시 설계할 필요가 있다. 최근 논의되는 국제적인 ESG 이슈로는 탄소국경세와 최저법인세율 규제 등이 있다. 한국의 경우 경제규모나 기술수준 측면에서는 선진국 수준에 진입하였으나, 환경 및 에너지 측면에서는 아직까지 중간적 상황에 처한 것으로 판단된다. 따라서 ESG 관련 국제 논의에 적극 참여하고 관련 제도를 정비하는 동시에, 급속한 제도 변화에 따라 부담이 과중할 수 있는 일부 산업이나 중소기업에 대한 단계적 이행 및 지원 방안을 함께 고려해야 할 것이다. 제5장에서는 ESG 국가정책 사례를 살펴본다. 현재 유럽연합(EU)이 ESG 확산 및 정책 제도화에 가장 선도적인 것으로 판단된다. 최근 몇 년 사이 ESG 인프라인 녹색분류체계, 지속가능금융 공시, 기업지속가능 공시, 기업 공급망의 인권 및 환경 실사 의무, 탄소국경세 등 많은 제도를 선도적으로 입법화하였다. 미국은 바이든 정부 들어 민주주의 회복과 인권 강화, 디지털 혁신과 불평등 해소, 지역사회 발전, 교육 불평등 해소, 다양성의 확대와 평등 실현, 기업투명성 및 기업 책임의 확대 등 ESG와 밀접한 연관성을 갖는 국정 목표들을 입안하였다. 국가 차원에서 온실가스 배출의 사회적 비용 추산, 국가안보와 외교정책 차원의 기후변화 위기 대응방안 구축, 기후변화의 금융위험 측정과 평가, 그리고 이를 규제ᆞ감독하는 정책 마련, 퇴직연금 운영에서 ESG 요소를 포함한 비재무적 위험과의 연계정책 등을 추구하고 있다. 일본은 기업의 다양성 경영을 장려하기 위한 ‘다양성 가이드라인’을 마련하고 다양성 우수기업에 대한 표창제도를 운영하고 있다. 그리고 임직원들의 건강관리를 경영전략 차원에서 강조하는 ‘건강경영’을 국가적으로 지원하는 ‘건강경영 우량법인 인증제도’와 거래소 건강경영 종목 선정과 같은 제도를 마련하여 직원의 건강을 회사 경쟁력으로 연결하고 있다. 중국은 사회주의 국가 차원에서 개인과 기업의 사회신용(social credit)을 평가한다. 개인신용을 국가 차원에서 관리하는 것은 개인의 자유를 침해하므로 바람직하지 않지만, 기업 차원의 적용방안은 고려할 만하다. 예를 들어 탈세 등 사회적 물의를 일으킨 기업에 대한 정보를 사회적으로 공유하고 공공지원 정책 및 규제정책에서 차별적 대우를 할 수 있을 것이다. 최근의 공동부유 정책은 소득과 부의 양극화 문제와 빈곤 퇴치를 목적으로 한다는 점에 의의가 있으나, 기업과 민간의 자발성을 억제하는 부작용 측면에서 주의가 필요하다. 거대 플랫폼 기업 단속 등 독점금지나 교육 형평성 확대를 위한 조처 등도 관심 있게 지켜볼 만한 ESG 정책이다. 인도는 세계에서 유일하게 기업의 사회적 책임을 회사법에 의무화한 국가이며, CSR 지출의무 불이행 시 회사와 관련 임원에 대해 형사처벌이 가능하다. 이러한 제도를 일반적인 자본주의 국가에서 그대로 적용하기는 어려울 것이나, 적절한 변용방안을 모색해 볼 필요는 있을 것이다. 한편 2021년 10월 8일 OECD 회의에서 136개 국가 등이 최저 법인세율 도입을 합의하여 2023년부터 발효될 예정이다. 국제적으로 조세 관련 공시가 점차 강화되는 추세이므로, 한국도 조세 투명성을 더욱 높여 기업의 사회적 기여를 제고하는 정책을 강구할 필요가 있다. 기업의 역외 납세 정보 공개를 의무화하여 일반에게 공개하는 정책을 ESG 차원에서 검토할 필요가 있을 것이다. 제6장에서는 투자 및 기업경영을 위한 ESG 지원정책을 다룬다. ESG 활동과 관련하여 국가와 민간 사이의 이상적인 역할분담은 국가와 시장이 각자 장점을 활용하여 협력하고 조화를 이루는 것이다. ESG 금융에는 ESG 범주 해당 여부를 판단하는 기준, 즉 녹색분류체계(taxonomy)가 필요하다. 그리고 ESG 공시제도는 현재 민간의 비영리기관을 중심으로 표준을 마련하기 위해 노력하고 있으나, 통일된 양식이나 기준이 존재하지 않는다. 정부가 ESG 정보 인프라를 구축하고 관련 법규를 정비한다면, 민간영역의 기업 감시 및 평가 활동을 활성화하는 데 많은 도움이 될 것이다. 기업의 ESG 활동에 대한 자본시장의 평가를 목적으로 개발된 ESG 평가제도도 중요하다. 그러나 평가기관마다 방식이 크게 다르고 결과들의 상관관계도 매우 낮은 실정이다. 해외 주요 기관들의 ESG 평가가 한국의 상황을 적절히 반영하지 못한다는 우려가 제기되기도 한다. 정부가 ESG 평가를 직접 담당하는 것은 시장원리를 저해할 수 있으므로 바람직하지 않지만, ESG 평가의 전반적인 틀을 관리하는 것은 평가지표 관련 문제를 해결하는 데 크게 기여할 것으로 기대된다. 제7장에서는 ESG 관련 국가정책을 전략적으로 통합 설계하고 실행하는 방안에 대해 논의한다. 현재 국가전략 차원에서 추진되는 주요 ESG 정책들로는 K-SDGs 및 한국판 뉴딜정책 등이 있다. 그리고 국가균형발전위원회와 저출산고령사회위원회 등 23개 대통령 직속 위원회가 구성되어 국가적 이슈에 대한 정책체계를 자문 및 심의하고 있다. 국무총리와 각 부처 산하 위원회도 500개 이상 운영되고 있다. 이러한 정책체계는 전 세계적으로 확산되는 ESG 논의 및 국제 시류 변화에 적절히 대응한 것으로 판단된다. 다만 여러 위원회나 부처에서 중복적으로 집행되는 정책으로 인한 비효율성과 상충효과 유발이 우려되므로 통합적인 정책 설계 및 실천 방안을 모색할 필요가 있다. 국무총리실 산하 59개 위원회 가운데 행정협의조정위원회가 있지만, 효과적인 ESG 실천을 위해 보다 통합적인 정책 컨트롤 타워가 필요하다. 이를 위해 국가 ESG 위원회를 설립하고, 부처별로 정기적으로 주요 이슈에 대해 ESG 관점에서 정책을 평가하는 보고서를 작성하며, 이를 취합하는 국가 ESG 전략보고서를 매 기간 공시할 것을 제안한다. 정책중복을 효율적으로 통제하고 관리하기 위해서는 개별 정책을 모듈화하고 분류기호와 태그(tag)를 부여하는 등 정책 분류체계(taxonomy)를 마련할 필요가 있다. 정책 분류체계는 최상위 수준에서 ESG 국가전략에 근거하고 녹색분류체계(K-taxonomy)와도 일관성을 유지해야 한다. 그리고 현재 우리 사회가 처한 주요 문제 내지 위험들을 ESG 관점에서 정리하고, 위험 범주별로 기존 정책목표들을 맵핑(mapping)하여 상호 연결성을 파악할 필요가 있다. 사회적 ‘문제’ 내지 ‘위험’을 가칭 K-Risks Matrix로 구성한 다음 K-SDGs를 그 해결방안의 핵심으로 포괄하는 작업이 필요하다. K-Risks Matrix는 한국사회가 직면한 위협요소들의 가능성(likelihood)과 충격성(impact)을 도식화하는 개념으로서, 세계경제포럼(WEF)의 글로벌 리스크 리포트(Global Risk Report) 내용을 기반으로 작성할 수 있을 것이다. 마지막으로 제8장은 결론 및 요약이다. 현재 ESG 논의는 투자와 경영 측면에서 E와 G 개념이 많이 강조되고 있는데, 국가전략 차원에서는 S 개념이 훨씬 더 중요하다. 따라서 한국사회가 직면한 주요 문제를 파악하고, 개별 대응정책들의 상호관계를 점검하여 전략적으로 조정 및 통합할 필요가 있다. 공동체의 지속가능한 번영을 추구하는 ESG 가치체계가 국가 전반의 포용적 제도로 정착되고 국정운영의 궁극적인 가치체계로 작동해야 한다. 이를 위해 이념이 아닌 실용적 관점에서 국가와 시장이 협력하고 조화하는 정책방안을 적극적으로 모색해야 한다. 구체적인 정책방안으로는 먼저 정보인프라를 구축하기 위해 ESG 활동의 개념 정의와 분류체계(taxonomy)를 마련하고, 이에 기초하여 회계 및 공시 제도를 정비해야 한다. 특히 이미 과열 양상을 보이는 각종 평가 프로그램 및 지표 산출사업에 대해 적절한 규제와 감독제도를 마련해야 할 것이다. ESG 인프라 정책의 기본 목표는 민간의 ESG 관련 정보 및 평가 산업에서 공정하고 효율적인 경쟁이 가능하도록 유도하는 것이다. 그리고 ESG 국가전략을 통합적으로 기획하고 실행할 수 있는 컨트롤 타워로서 국가 ESG 위원회를 설립하고, 주요사안에 대한 ESG 관점의 정책평가보고서를 수시로 작성하며, 국가 ESG 전략보고서를 정기적으로 공시할 것을 제안한다. English Abstract: Recently, ESG(Environment, Society, and Governance) concerns are rapidly growing both domestically and internationally in various fields such as investments, management, consumers, and government policies. Beyond the concept of investment criteria or policy instruments, ESG can be defined as a value system for sustainable prosperity of the human community. ESG issues are rapidly becoming impending socioeconomic risk factors, but it is also being actively researched and implemented as an opportunity and solution in a variety of fields. The current popularity of ESG can be explained in terms of the role-sharing relationship between the government and the market. The characteristics of political demands have altered as existing socioeconomic problems have accumulated. And the technologies that could be used to solve problems advanced quickly. As a result, not only has the nature of the problem in each industry changed dramatically but so has the relative superiority of efficiency between the market and the state. In the role-sharing of the market and the state, there are wide spectra between mutually exclusive extremes of market failure and government failure. Shareholder capitalism has not been able to adequately respond to various side effects that damage the natural environment and social community in the process of pursuing economic growth. In the early 1980s, the international organizations began addressing sustainable development in which current economic development does not jeopardize future generations’ economic prosperity. Concerns about sustainability began with environmental issues and grew to include human rights and social ideals. It has been summed up as the ESG concept in recent years, which encompasses three aspects: environmental, social, and corporate governance. We present examples of companies that are following an ESG approach. Many businesses are spearheading ESG initiatives, and their patterns vary. Some companies, such as Patagonia, have been doing ESG activities consistently since the beginning. In some cases, such as with Unilever, ESG difficulties are represented in existing business practices, but corporations like Schneider Electric, CLP Group, and Oersted have entirely rebuilt their businesses, eliminating certain existing businesses and launching new ones that are compatible with ESG ideals. ESG is also attracting a lot of attention from Korean businesses, particularly in the area of environmental challenges. Given the current situation in Korea, where controlling owners frequently exercise management rights, corporate governance challenges are considered to represent both a threat and an opportunity for the Korean firms. National ESG strategies are also required, in addition to business ESG plans. The notion of “market failure” serves as a justification for national policy intervention in general. Many initiatives, however, have unintended consequences or are ineffective, as the term “government failure” implies. Market and government roles should be linked on the basis of efficiency. Not a binary distinction of “market or government,” but new frameworks of collaboration between the “market and the government” should be sought. Referring to the remarkable ICT developments such as AI and big data, cutting-edge financial instruments, and various organizational/ management techniques, it is necessary to readjust the existing government policy intervention area and redesign the method innovatively. Carbon taxes and minimum corporate tax rate regulations are two contemporary international ESG concerns that have been explored. Korea has evolved in terms of economic size and technological level, but still remains developing status with the environmental and energy challenges. As a result, we should create phased implementation schemes and support systems for the significantly and abruptly burdened industries and SMEs, while actively participating in international ESG talks and reforming associated institutional structures. We also present policy examples from a variety of countries on ESG challenges. The European Union (EU) has taken the lead in instituting ESG regulations such as green taxonomy, sustainable financial disclosure, corporate sustainability reporting, human rights and environmental due diligence responsibilities of business supply chains, and carbon taxes. The U.S. Biden administration drafted state goals closely related to ESG, such as restoring democracy and strengthening human rights, digital innovation, regional development, resolving educational inequality, diversity and equality, and expanding corporate transparency and corporate responsibility. In Japan, diversity guidelines and health management strategies are notable. Individuals and enterprises’ social credit in China are assessed at the national level. This summer, the Chinese government formally unveiled the slogan “Common Prosperity.” Chinese ESG initiatives, such as outlawing monopolies, cracking down on giant platform businesses, and expanding educational equity, are also noteworthy. India is the only country in the world where corporate social responsibility is required by law, and non-compliance with CSR expenditure obligations can result in criminal penalties for firms and their leaders. Meanwhile, the OECD announced on October 8, 2021, that 136 countries and jurisdictions have agreed that certain multinational enterprises (MNEs) will be subject to a minimum 15% tax rate, effective from 2023. Korea also has to develop policies to improve tax transparency and corporate social responsibility. Investment and business management ESG infrastructures are also critical. This necessitates an adequate division of the roles between the public and private sectors. We need consistent standards for ESG financing, which necessitates an ESG disclosure system and a green taxonomy to determine whether it belongs under the ESG category. Many private agencies have started offering ESG rating services in recent years, but their rating methods are vastly different, and the results are under-correlated with each other. There are also worries that foreign agencies’ ESG assessments do not fully represent Korean-specific circumstances. It might not be a good idea for the government to conduct ESG evaluations directly because it could weaken market discipline. The government, on the other hand, should appropriately oversee the ESG rating system’s entire structure. We discuss how to establish and implement ESG policies in Korea in a strategic fashion. K-SDGs and the Korean New Deal are two of the most common ESG policies now in use. In addition, 23 Presidential Committees have been established to advise and deliberate on the national policy agenda, including the National Balanced Development Committee and the Aging Society and Population Policy Committee. In addition to the Prime Minister and ministries, there are around 500 committees. This policy approach appears to be in line with ESG trends that are now gaining traction around the world. However, because overlapping policy implementation by separate committees or ministries can lead to inefficiency and conflicts of interest, it is vital to examine integrated policy design and action plans. We recommend that the National ESG Committee, ESG reports from each ministry, and national ESG strategy reports are established. To begin, we need a policy classification system, such as modularizing individual policies, to effectively control and manage policy duplication. This system should be based on the ESG national plan and be as consistent as feasible with the green categorization system (K-taxonomy). From an ESG viewpoint, it is vital to identify major problems and hazards affecting our society, as well as to map existing policy goals for each risk category. We propose that social “issues” or “risks” be organized into the K-Risk Matrix, with K-SDGs as a primary subset of solutions. The K-Risk Matrix is a diagram that depicts the “likelihood” and “impact” of threats to Korean society, and it may be created using information from the World Economic Forum’s Global Risk Report. As an action plan, we must first define and taxonomize ESG activities and then construct ESG information infrastructures such as accounting and disclosure systems. ESG rating agencies, in particular, should be prepared with suitable regulations and supervisory processes. These ESG policy objectives should attempt to promote fair and efficient market competition and give a solution to both market and government failure.

In the last decade, companies have come under pressure to be socially conscious and environmentally responsible, with the pressure coming sometimes from politicians, regulators and interest groups, and sometimes from investors. The argument that corporate managers should replace their singular focus on shareholders with a broader vision, where they also serve other stakeholders, including customers, employees and society, has found a receptive audience with corporate CEOs and institutional investors. The pitch that companies should focus on “doing good” is sweetened with the promise that it will also be good for their bottom line and for shareholders. In this paper, we build a framework for value that will allow us to examine how being socially responsible can manifest in the tangible ingredients of value and look at the evidence for whether being socially responsible is creating value for companies and for investors.

This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, we find that institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Our evidence shows that institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S. In cross-section, investors increase firms’ E&S performance when they come from countries where there is a strong community belief in the importance of E&S issues, but not otherwise. Overall, these results indicate that investors drive firms’ E&S performance around the world and transplant their local social norms in that process.

We study how parent liability for subsidiaries’ environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court decision that strengthened parent limited liability protection for some subsidiaries. Using a difference-in-differences framework, we find that stronger liability protection for parents leads to a 5-9% increase in toxic emissions by subsidiaries. Evidence suggests the increase in pollution is driven by lower investment in abatement technologies rather than increased production. Cross-sectional tests suggest convexities associated with insolvency and executive compensation drive heterogeneous effects. Overall, our findings highlight the moral hazard problem associated with limited liability.

For informational perspective, this study intends to examine how informativeness of corporate non-financial disclosures, as a good informational surrogate for financial analysts, on financial analysts’ properties and behaviour that evidenced from standalone corporate sustainability report, released by the top 500 multinational corporations in terms of market capitalization, yearly turnover and profitability, testifying how financial analysts’ data drilling and information-producing processes being influenced by the latest on-rising publication trend, namely corporation social responsibility (hereafter CSR) information. Corporate sustainability reports, especially standalone type, are widely-adopted disclosed on the rise from now on, when checking up with prior empirical documents and archives in same context in past two decades that may provide an another new insight how usefulness and richness of socially and environmentally narrative information for sell-side financial analysts in information-making procedure on forecasting corporate future earnings as many argue that just like normal guys who perceptibly discomfort with lack of information in decision-making process, corporations, as a artificial natural person in the legal view, as well those social and environmental activities are likely assisting them predicting corporate current and future financial performance forecasts as well, thereby capturing the effect of how financial analysts to use such valuable non-10K or 20-K information on the corporate earnings forecasts during their forecasting process seemingly is needy and a must, undoubtedly. Alas, previous academic archives, journals, books, professional articles and etc demonstrate the results of evidential ambiguity some of them demonstrate inconclusive results and some even show inconsistent with prior work results in different country-specific or country-wide researches in which examination of the impact of corporate financial and non-financial disclosures on analyst following, forecast accuracy and dispersed forecasts they use various disclosure media, including the annual report, corporate website, the conference calls, social and environmental reports for their experimental studies. What is more, they use broader disclosure quality and quantity measurements with various codifying and rating (i.e. equal or researcher-subjective rating) systems via varieties of communication channels such number of pages, % of pages, number of words, number of sentences and scholars self-develop their originally identical research instruments to quantify corporate disclosure quality as well, impounded as a disclosure index or a rating score, in different content areas, namely “content analysis/ textual analysis” to examine the impact of corporate disclosure decision, disclosure quality and disclosure quantity on stock market price responsiveness, corporate cost of capital and financial analysts’ behaviour and so forth. Most of their results support firms do better in their disclosures on corporate financial and non-financial information can improve their uncertainty of corporate information environment, in turn reducing the magnitude information asymmetry in capital markets. The univariate and multivariate results demonstrate that in overall, financial analysts are likely following for firms split off their CSR from annual reports, measured by average number of financial analysts providing earnings per share forecasts one year ahead but a quarter (herein 90 days cut-off) before earnings announcement in that particular period, compared with control groups in which those firms that never issued those reports, after controlling for the firm financial and market performance, corporate characteristics, other institutional factors and fixed effects, reducing the potential omitted correlated effects, thereby reinforcing the validity of the empirical results. This study find out another new determinant of analysts’ coverage,namely corporate social responsibility standalone, the more creditability of corporate social responsibility reports, the quantity of corporate social responsibility reports, even the social and environmental disclosure index very likely influencing and dominantly determining the number of financial analysts. In the financial analysts’ coverage model specifications, the direction of all significant impactful variables are correctly as predicted as prior study and no any data falsification in this study. The future academic research and profession industries would continue to verify the analysts’ coverage determinants. Research Extracts 1. According to the world dictionary, “responsibility” can be effable, which is ‘the state or fact of being responsible, answerable, or accountable for something within one’s power, control, or management’. 2. Social responsibility picturesquely intertwined with Environmental initiatives into a single glitzy cavern and pit as Corporate Sustainability. 3. Corporations have societal obligations that transcend their responsibilities/ duty of care to shareholders. 4. As a businessman, he needs to make decisions being desirable yoking corporate internal objectives and righteousness as a whole in society. 5. Bowen (1953) is a father of CSR movement and the first bestowed CSR a definition as a “social responsibilities of businessmen/Businesswomen”. 6. Darwinian, a capitalism prodigy, advocates claim that ‘capitalism is a game of survival of fittest’ 7. Further, Skarmeas and Leonidou (2013) emblazon that corporate social involvement is not only a few companies but rather is a mainstream and a common practice for many corporations. 8. Wood (1991) manifests CSR as “business and society are interwoven rather than distinct entities”. 9. Ansoff (1965) was the first to use the term ‘stakeholder theory’ and in many senses, he is a true antecedent of Freeman (1984). 10. Affable and egocentric Carroll (1979; 1991) identifies four contact lens viewing social responsibilities of business, namely economics, legal, ethical, and benevolent and philanthropic. 11. Armstrong (1977) defines social irresponsibility as corporations making decisions only benefiting for one party at expense other parties and, worse still, the whole system. 12. Brown and Dacin (1997) argues that organizations should be beyond the single purpose to multipurposes. Based on his argument, the most fundamental level of the corporate entity is economic responsibilies, next legal responsibilities, ethical responsibilities and last but not least charitable/philanthropic responsibilities. 13. However, many scholars still condemn about lacks of terse definitions of CSR. 14. These debates failure perfectly soothe fundamental issues related to the duties and obligations of companies that engage in CSR imitative. 15. There are a number of protagonist that advocate CSR, though, there is also a radical skepticism and antagonism towards it 16. Stakeholder-agency theory is also used to explain why companies have to satisfy stakeholders’ concern to shred their utility loss arising from very diabolical CSR initiatives. 17. Mitchell et al. (1997) classify stakeholders based on the salience into eight categories from the rank- descending priories (non stakeholder, dormant, discretionary, demanding, dangerous, dominant, dependent and definitive). 18. Principal-Agency Theory: the principal finds it difficult or expensive to monitor and verify what the agent is actually doing or slothful. 19. This perspective wittingly emanating from leadership literature from the 1990s. 20. the agents shirk from the responsibility because the principals cannot monitor what the agents are actually doing. 21. humanists theory: the humanists spitefully quarrel that companies’ responsibilities solely relate to the working environment, including the motivation and self-actualisation of employees. 22. According to resource-based theory, a company’s participation in CSR activities can be considered a political strategy geared up heading towards increasing the average cost other competitors​ must incur. 23. The priceless, precious and lustrous resources of businesses should be utterly utilized for broader sense than for internal purposes. 24.In addition, firms with a strong tradition of environmental preservation through conservation of natural resources, effective waste management and recycling programmes, and emission controls may be less vulnerable to litigation and fines or liability remediation. 25. Woodward et al. (2001) also argue that organizations are operating under a command, edicts and writs from governors of the society, but they, if behaving not as the society expects, can be withdrawn. 26. Therefore, the capital and labor markets are going to coax those, who perform poorly or do not work in the interest of the shareholders, away. 27. if the organizations running decimates the social norms, their operational indictments may become savage. 28. Although these practices are costly for the company, it can in turn increase their productivities and reduce “wicked, wrecked and wretched” products. 29. Even though there is no any litigation issues, consumers’ negative words of month and pummeling and protesting behaviour against corporate social irresponsibility and environmental unfriendliness can also influence firm sales and reputation, directly and indirectly resulting in direful economic performance. 30. In recent years, the widespread of prejudicial and unpleasant unease customers take anti-actions negatively seeping towards firms such as boycott, outrage, outcry, intimation, scepticism, suspicion, distrust, perception of social irresponsibility and others. 31. Effective CSR initiatives cultivate positive relationships with capital providers because firms with good social reputations likely face lower risk associated with distrust, pummels, protests, strikes, boycotts and other issues related to negative consumer sentiment, slurring and tarnishing corporation reputation and goodwill. 32. customers are, If companies do not treat customers jauntily and aflutterly, likely to seek other companies that treat them better or sue the existing companies for providing poor quality product under tort and contract laws. 33. Socially responsible companies are not susceptible to negative events. Consumerism is a social movement seeking to augment the rights and powers of buyers in relation to disappointment and gut to sellers. 34. Financial analysts’ decision making in that lousy CSR initiatives seamlessly smear corporate reputation in the community due to abhorred, hatred and outrageous customers uprising, embittered employees upheaving and suppliers uproaring, plummeting companies’ future earnings and soaring operating risks. 35. This approach is also a disclosure indiex technique but more intricate to set disclosure indices. 36. More effective CSR-related activities in this regard likely less susceptible external effects on organisational reputation dropping among stakeholders. 37. Similarly, companies have lithely practiced international reporting standards to present information related to the firm. 38. The advantages of computerised analysis are that it is interface-friendly, nimble, less costly, niche and standardised (Kondracki et al., 2002) 39. ………..it can encourage workers to take more voluntary tasks and lessening insolent, impudent, and impertinent behavior towards employees can increase their productivity of work, 40. The 1989 ‘Exxon Valdez’ oil spill is a typical example in which the Exxon Valdez crude oil drilling tankers and probes struck a rock formation on Bligh Reef in Alaska. 41. The company was fined US$150 million for environmental scandal and other perfidious treasons. 42. Firms that engage in CSR activities are less prone to costs associated with negligent behavior. 43. It is instructive here to succinctly disintegratively consider four overarching (and progressively more inclusive) perspectives as to why entities behave socially responsibly?

Can female directors help save economies and the firms on whose boards they sit? Policy makers seem to think so. Numerous countries have implemented boardroom gender policies because of business case arguments. While women may be the key to healthy economies, I argue that more research needs to be done to understand the benefits of board diversity. The literature faces three main challenges: data limitations, selection and causal inference. Recognizing and dealing with these challenges is important for developing informed research and policy. Negative stereotypes may be one reason women are underrepresented in management. It is not clear that promoting them on the basis of positive stereotypes does them, or society, a service.

This study examines the relationship between returns and risks in low-carbon investing, with a particular focus on how financial markets evaluate a firm’s carbon management performance. Using a dataset of 120,050 observations from 1,715 U.S. companies for the period between January 2005 and December 2018, we construct a portfolio termed “Efficient-Minus-Inefficient” (EMI), based on firm-level carbon emission intensity (revenue-adjusted carbon emissions) as well as other characteristics such as size and book-to-market ratio. The EMI portfolio mimics an investment strategy that favors long positions in carbon-efficient firms and short positions in carbon-inefficient firms. Our analysis reveals that, since 2009, the EMI portfolio has generated positive and statistically significant abnormal returns, ranging from 3.4% to 5.4% annually (excluding smaller market cap firms). Notably, the positive alpha of the EMI portfolio comes from the outperformance of carbon-efficient firms, not from the underperformance of carbon-inefficient ones. Moreover, these findings remain robust even when accounting for industry-specific factors and other macroeconomic conditions, including fluctuations in oil prices and shifts in investor preferences due to the low-interest-rate environment following the 2008 financial crisis. Not Available for Download Add Paper to My Library Share: Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Carbon Emission Intensity and Stock Returns Stanford Global Project Center Working Paper Posted: 21 Aug 2017 Last revised: 7 Sep 2023 Soh Young In Korea Advanced Institute of Science & Technology (KAIST); Stanford University – School of Engineering Ki Young Park Yonsei University Ashby Monk Stanford University Date Written: April 16, 2019 Abstract This study examines the relationship between returns and risks in low-carbon investing, with a particular focus on how financial markets evaluate a firm’s carbon management performance. Keywords: corporate environmental sustainability; corporate carbon management; carbon intensity; portfolio management; low-carbon investing; multi-factor asset pricing model; carbon efficient-minus- inefficient (EMI) portfolio JEL Classification: G12, G30, P18 Suggested Citation: In, Soh Young and Park, Ki Young and Monk, Ashby, Is ‘Being Green’ Rewarded in the Market?: An Empirical Investigation of Carbon Emission Intensity and Stock Returns (April 16, 2019). Stanford Global Project Center Working Paper, Available at SSRN: https://ssrn.com/abstract=3020304 Not Available for Download 0 References 4 Citations Patrick Bolton , Marcin T. Kacperczyk Do Investors Care About Carbon Risk? CEPR Discussion Paper No. DP14568 · 83 Pages · Posted: 8 May 2020 · Downloads: 4 Add To Cart Add Paper to My Library Guillaume Coqueret Perspectives in ESG equity investing 81 Pages · Posted: 13 Nov 2020 · Last revised: 10 Mar 2021 · Downloads: 3,982

Many institutional investors are spending considerable resources on engaging with companies on environmental, social, and governance (ESG) issues through dialogue, to promote the adoption of enhanced sustainability practice and reporting. At the same time, little is known about the roles played by intermediary organizations to which such engagement is often delegated, nor about how the use of an intermediary may shape the engagement process. To address this question, we conducted a qualitative case study of a three-year thematic engagement project on carbon risk focused on twenty energy companies and conducted by a single manager at one intermediary organization. Relying on a unique archival access capturing the log of dialogues between an engagement intermediary and twenty multinational corporations (MNCs) and supporting interviews, we identify and conceptualize four roles performed by engagement intermediaries to elicit companies’ responses: business diplomats, communication managers, soft regulators, and free sustainability coach and consultant. Our results highlight how these roles are mobilized through the engagement process in ways that help manage saliency in practice to enhance the impact of engagement on companies. Not Available for Download Add Paper to My Library Share: Unpacking the Roles of Shareholder Engagement Intermediaries: A Case Study of an Engagement Process on Carbon Risk Posted: 9 Aug 2019 Jean-Pascal Gond Cass Business School Emma Sjöström Stockholm School of Economics Date Written: April 13, 2019 Abstract Many institutional investors are spending considerable resources on engaging with companies on environmental, social, and governance (ESG) issues through dialogue, to promote the adoption of enhanced sustainability practice and reporting. Keywords: ESG, engagement, social practice, occupational roles, carbon risk JEL Classification: M14, G15, G23 Suggested Citation: Gond, Jean-Pascal and Sjöström, Emma, Unpacking the Roles of Shareholder Engagement Intermediaries: A Case Study of an Engagement Process on Carbon Risk (April 13, 2019). Available at SSRN: https://ssrn.com/abstract=3433340 or http://dx.doi.org/10.2139/ssrn.3433340 Not Available for Download 0 References 0 Citations Do you have a job opening that you would like to promote on SSRN? Place Job Opening

We exploit unexpected corporate data breaches to study the loss and repair of corporate reputation. Reputation loss decreases equity value and brand value, increases customer churn and prompts more negative media coverage. Firms repair their reputation by increasing their charitable donations (a novel measure of CSR investment), political contributions, employee wages and investment in IT. These actions are targeted to stakeholders that are particularly important or in situations that are particularly salient to their stakeholders. We observe similar dynamics of reputation loss and repair following the release of negative news about firms’ social behaviors.

Corporate Social Responsibility (CSR) refers to the incorporation of Environmental, Social, and Governance (ESG) considerations into corporate management, financial decision making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities (e.g. pollution) they create, and are willing to be accountable to shareholders as well as a broader group of stakeholders (employees, customers, suppliers, local communities,…). Over the past two decades, various rating agencies developed firm-level measures of ESG performance, which are widely used in the literature. A problem for past and a challenge for future research is that these ratings show inconsistencies, which depend on the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing (SRI). The return implications of investing in the stocks of socially responsible firms, the search for an EGS factor, as well as the performance of SRI funds are the dominant topics. SR funds apply negative screening (exclusion of ‘sin’ industries), positive screening, as well as activism through proxy voting or direct engagement. In this context, one wonders whether responsible investors are willing to trade off financial returns with a ‘moral’ dividend (the return given up in exchange for an increase in utility driven by the knowledge that one invests ethically). A recent literature concentrates on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic de-carbonization as climate change affects financial markets and investor behavior.

Tradable permit regulations have recently been implemented for climate change policy in many countries. One of the first mandatory markets was the EU Emission Trading Scheme, whose first phase ran from 2005-07. Unlike taxes, permits expose firms to volatility in regulatory costs, but are typically accompanied by property rights in the form of grandfathered permits. In this paper, we examine the effect of this type of environmental regulation on profits. In particular, changes in permit prices affect: (1) the direct and indirect input costs, (2) output revenue, and (3) the carbon permit asset value. Depending on abatement costs, output price sensitivity, and permit allocation, these effects may vary considerably across industries and firms. We run an event study of the carbon price crash on April 25, 2006 by examining the daily stock returns for 90 stocks from carbon intensive industries and approximately 600 stocks in the broad EUROSTOXX index. In general, firms in industries that tended to be either carbon intensive, or electricity intensive, but not involved in international trade, were hurt by the decline in permit prices. In industries that were known to be net short of permits, the cleanest firms saw the largest declines in share value. In industries known to be long in permits, firms granted the largest allocations were most harmed.

Interest in ESG is at an all-time high. However, academic research on ESG is still relatively nascent, which often leads us to apply gut feel on the grounds that ESG is so urgent that we cannot wait for peer-reviewed research. This paper highlights how the insights of mainstream economics can be applied to ESG, once we realize that ESG is no different to other investments that create long-term financial and social value. A large literature on corporate finance studies how to value investments; asset pricing explores how the stock market prices risks; welfare economics investigates externalities; private benefits analyze manager and investor preferences beyond shareholder value; optimal contracting considers how to achieve multiple objectives; and agency theory examines how to ensure that managers pursue shareholder preferences, including non-financial preferences. I identify how conventional thinking on ten key ESG issues is overturned when applying the insights of mainstream economics.

We provide evidence that banks increase cross-border lending in response to higher climate policy stringency in their home countries. Saturating with granular set of fixed effects and including a rich set of control variables, we show that the increase in cross-border lending is not driven by loan demand and/or other bank home country characteristics. In line with banks use cross-border lending as a regulatory arbitrage tool, the increase in cross-border lending occurs only if banks’ home countries have more stringent climate policy compared to their borrowers’ countries. The effect is stronger for large, lowly capitalized banks with high NPL ratios and for banks with more experience in cross-border lending. Our results suggest that without a global cooperation, cross-border lending can be a channel that reduces the effectiveness of climate policies. Purchase – $8 CEPR Subscribers Download Add Paper to My Library Share: “There is No Planet B”, But for Banks There are “Countries B to Z”: Domestic Climate Policy and Cross-Border Bank Lending CEPR Discussion Paper No. DP16665 33 Pages Posted: 9 Nov 2021 Emanuela Benincasa Swiss Finance Institute; University of Zurich – Department of Finance Gazi Kabas University of Zurich Steven Ongena University of Zurich – Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR) Date Written: October 1, 2021 Abstract We provide evidence that banks increase cross-border lending in response to higher climate policy stringency in their home countries. Keywords: Climate Policy, Cross-border lending, regulatory arbitrage, syndicated loans JEL Classification: G21, H73, Q58 Suggested Citation: Benincasa, Emanuela and Benincasa, Emanuela and Kabas, Gazi and Ongena, Steven R. G., “There is No Planet B”, But for Banks There are “Countries B to Z”: Domestic Climate Policy and Cross-Border Bank Lending (October 1, 2021). CEPR Discussion Paper No. DP16665, Available at SSRN: https://ssrn.com/abstract=3960269 Purchase – $8 CEPR Subscribers Download 33 References Alberto Abadie , Susan Athey , Guido W Imbens , Jeffrey Wooldridge When Should You Adjust Standard Errors for Clustering? National Bureau of Economic Research Working Paper Series Posted: 2017 Christina Atanasova , Eduardo S Schwartz Stranded Fossil Fuel Reserves and Firm Value National Bureau of Economic Research Working Paper Series , volume 3 , issue 8 Posted: 2019 Söhnke M Bartram , Kewei Hou , Sehoon Kim Real Effects of Climate Policy: Financial Constraints and Spillovers Journal of Financial Economics , volume 2 Posted: 2021 Patrick Bolton , Marcin Kacperczyk Do Investors Care about Carbon Risk? Journal of Financial Economics , volume 5 Posted: 2021 Load more 4 Citations Viral V. Acharya , Richard Berner , Robert F. Engle , Hyeyoon Jung , Johannes Stroebel , Xuran Zeng , Yihao Zhao Climate Stress Testing FRB of New York Staff Report No. 1059. Rev. June 2023. · 48 Pages · Posted: 10 Apr 2023 · Last revised: 31 Mar 2025 · Downloads: 351

We study how restricting intermediary contracting over ESG policies distorts financial market outcomes. In 2021 Texas prohibited municipalities from hiring banks with certain ESG policies, leading to the abrupt exit of five large municipal bond underwriters. Issuers with historical relationships with the barred underwriters face higher uncertainty and borrowing costs after enactment of the laws, amounting to $300-$500 million in additional interest on $31.8 billion borrowed. These effects are consistent with deterioration in underwriter competition and loss of relationship-specific assets. We do not find that underwriter distribution network access or capacity constraints have a major impact on borrowing costs.

This paper investigates how shocks to expected cash flows influence CEO incentive compensation. Exploiting changes in compliance with environmental regulations as shocks to expected future cash flows, we find that adverse shocks typically prompt corporate boards to recalibrate CEO compensation to reduce risk-taking incentives. However, this pattern is not uniform. Financially distressed firms exhibit milder reductions in compensation convexity, with some even increasing it, suggesting a “gambling for resurrection” strategy. Moreover, the strength of corporate governance influences shareholders’ capacity to align executive incentives with shareholder risk preferences following unanticipated changes in the stringency of environmental regulations. Institutional subscribers to the NBER working paper series, and residents of developing countries may

This paper investigates whether green investors can influence corporate greenhouse gas emissions through capital markets, and if so, whether the effect is larger from divesting polluters’ stock in order to limit their access to capital, or acquiring polluters’ stock and engaging with management as owners. We focus on public pension funds, classifying them as green or nongreen based on which political party controlled the fund. To isolate the causal effects of green ownership, we use exogenous variation caused by state-level politics that shifted control of the funds, and portfolio rebalancing in response to returns from non-equity investment. Our main finding is that companies reduced their greenhouse gas emissions when stock ownership by green funds increased and did not alter or increased their emissions when ownership by nongreen funds increased. Other evidence based on proxy voting, shareholder proposals, and activist pension funds suggests that ownership mattered because of active engagement by green investors, and through attempts to persuade more than voting pressure. We do not find that companies with green investors were more likely to sell off their high-emission facilities (greenwashing). Overall, our findings suggest that (a) corporate managers respond to the environmental preferences of their investors; (b) divestment of polluting companies may lead to greater emissions; and (c) private markets may be able to partially address environmental challenges independent of government regulation.

In Australia’s Murray Darling Basin (MDB), short term (allocation) and long term (entitlement) water rights are separately traded, centrally reported, and disseminated to the public. I utilize this setting to demonstrate three primary findings concerning water rights and climate change risk. First, water rights appear to be a climate change hedge: in periods of diminishing supply, allocation cash flows spike as price increases offset quantity declines. Second, since 2014, entitlement prices in climate exposed areas have increased approximately $1500 per MegaLitre (about 39%) more than prices in non-climate exposed areas while allocation prices have remained similar in both areas. These price differences provide a clear market signal about future scarcity and help to define investment opportunities available today to preserve water resources. Finally, estimating the allocation cash-flow to rainfall elasticity and extrapolating using the 2050 IPCC rainfall scenarios, I attribute about 21% of the price effect to differences in expected cash flow, and the remainder to a lower discount rate. The premium I estimate equates to a 1.2% lower rate of return for climate hedge or mitigation assets, a critical parameter in climate economics.

We examine whether foreign institutional capital promotes green growth in emerging-market (EM) firms, using firm-level and China A-shares’ market-level inclusions in the MSCI Index as shocks to foreign capital. While foreign capital boosts output, emissions rise disproportionately in EM firms, leading to substantial increases in emissions intensity. In contrast, the emissions intensity of developed-market firms tends to decrease with foreign capital, enabling investors to offset deterioration in portfolio carbon metrics while benefiting from higher returns on EM investments. The increases in emissions are concentrated in countries with weaker environmental regulations and firms held by investors driven more by financial incentives. Our results suggest that foreign investors prioritize financial performance over portfolio carbon metrics when investing in EM firms.

How does competition affect banks’ adaptation to emergent risks for which there is limited supervisory oversight? The analysis matches detailed supervisory data on home equity lines of credit with high resolution flood projections to identify climate risks. Following Hurricane Harvey, banks updated their internal risk models to better reflect flood risk projections, even in areas unaffected by the disaster. These updates are only detected in banks with exposures to the disaster, indicating heterogeneous bank learning. We use this heterogeneity to identify how bank adaptation is affected by competition. Exposed banks reduce lending to areas with higher flood risks, but only in less competitive markets, suggesting that competition fosters risk-taking over risk mitigation. Additionally, banks are less likely to adapt in markets where competitors are also less likely to do so, suggesting a strategic complementarity in bank adaptation. More broadly, our paper sheds light on the role of competitive forces in how banks manage emerging risks and relevant supervisory challenges.

Enlightened shareholder value (ESV) is the idea that corporations should pursue shareholder wealth with a long-run orientation that seeks sustainable growth and profits based on responsible attention to the full range of relevant stakeholder interests. This approach to management contrasts with a short-term focus on current share price even when that objective entails immediate or longer-term negative effects on nonshareholders. The combination of a long-run, sustainable conception of value coupled with acknowledgement of the importance of stakeholder considerations for achievement of that goal resonates with notions of corporate social responsibility (CSR). In this paper I consider whether market pressures might generate a version of ESV that could have the effect of shifting US transnational corporations away from narrowly focused shareholder primacy. The model I explore here is based on corporate risk management practices. Activities – such as labor and environmental policies – that reduce operating expenses in the short-term may present litigation and reputational risks because of the threat of public exposure, especially by non-governmental organizations (NGOs) and the media. The result may be significant litigation and settlements costs, as well as negative reputational effects in product, labor, and capital markets. Extra-legal pressures rather than new legal mandates could thereby redefine management responsibility and corporate purpose, and, because concerned private actors apply the pressure, public opinion about socially acceptable behavior drives management’s rethinking of its role. The result may be a richer, more socially-oriented notion of the corporate objective, shaped by public opinion rather than legal intervention. Having presented this model, I then suggest that some caveats are in order. It is highly doubtful that private actors alone can generate the amount of information needed to hold transnational corporations fully accountable for their behavior. And, even when misdeeds are exposed and pressure brought to bear, it is not clear that corporations necessarily deal fully with the problems they have created. Public relations and reputational recovery may be the real objective. Finally, and most importantly, this approach to CSR is driven by bottom-line considerations. ESV is still about shareholder value after all, and this objective imposes a limit on how far corporations are likely to be willing to go. To the extent this is true, critics of transnational corporations should not expect that a commitment to shareholder value – even if enlightened – will necessarily generate the measure of socially responsible behavior that they believe to be appropriate. There may still be a role for law.

We introduce the decomposition of carbon emissions into an expected and an unexpected component and analyze the association between these components and firm value. The expected component captures a firm’s average carbon emissions inherent to its business model and operating environment. The unexpected component, meaning the firm-specific deviation from expected carbon emissions, reflects the management’s effort and ability to implement carbon management and actively influence carbon emissions. For a sample of US firms operating in carbon-intensive industries, we estimate the expected component using a regression of carbon emissions on firm characteristics and industry. The residual of this regression represents the unexpected component. The results reveal that, on average, investors attach value to both components. While investors consider the expected component to be relevant regardless of assurance, they consider the unexpected component to be more relevant in the presence of assurance. The assurance alleviates credibility concerns about the information content of the unexpected component. Additionally, we confirm the nomological validity of our measure of the unexpected component, as it is negatively related to indicators of better carbon management systems. Not Available for Download Add Paper to My Library Share: The Market Value of Decomposed Carbon Emissions Journal of Business Finance & Accounting (2022); available at https://doi.org/10.1111/jbfa.12616 Posted: 16 Jun 2022 Last revised: 1 Mar 2023 Christian Ott EM Strasbourg Frank Schiemann University of Bamberg Date Written: May 18, 2022 Abstract We introduce the decomposition of carbon emissions into an expected and an unexpected component and analyze the association between these components and firm value. Keywords: carbon emissions, firm value, value relevance, decomposition JEL Classification: C23, G32, M41 Suggested Citation: Ott, Christian and Schiemann, Frank, The Market Value of Decomposed Carbon Emissions (May 18, 2022). Journal of Business Finance & Accounting (2022); available at https://doi.org/10.1111/jbfa.12616 , Available at SSRN: https://ssrn.com/abstract=4130323 Not Available for Download 0 References 0 Citations Do you have a job opening that you would like to promote on SSRN? Place Job Opening

This study uses a large sample of Korean firms to examine institutional blockholders’ influence on corporate earnings management. The Korean market is an interesting setting to study institutional monitoring because it is dominated by chaebols, which are characterized by ineffective internal governance mechanisms. We find evidence that institutional blockholders deter opportunistic financial reporting, and such activities are the most evident among domestic institutional blockholders. Foreign institutional blockholders, especially those with short-term investment objectives, lead to more discretionary reporting. Our findings are robust to various empirical models and endogeneity checks. Moreover, this study offers new insight into the proximity advantage of domestic institutional investors with regard to monitoring information. It also highlights institutional investors’ roles in shaping corporate governance in emerging markets, in which sound corporate governance has become increasingly important for firms’ long-term sustainability. One important policy implication is that regulatory authorities should aim to promote institutional investors’ participation in these markets.

In this paper, we try to identify the relationship between the ESG scores and stocks’ performance and risk measures. Using the ESG database of MSCI, we split the global investment universe into three regions: Europe, North America and Asia-Pacific. The investment universe of each region is defined by the components of the corresponding MSCI index which is rebalanced every month. A simple statistical check allows us to verify the integrity of the database. For the portfolio construction of E/S/G/ESG factors, the ESG scores are normalized for all stocks in the same sector such that the sectorial bias is minimized. We find that Governance score can significantly improve the portfolio’s performance both in Europe and North America, meanwhile, the market of Asia-Pacific is not sensitive to E/S/G/ESG scores. It is interesting to remark that the Governance factor in Europe can be explained by traditional Quality factor, meaning that there is some equivalence between Governance score and Quality indicators. In terms of risk measures, we observe that stocks with higher Governance and Environmental scores are exposed to lower risks measured by maximum drawdown or volatility, for Europe and North America. In Asia-Pacific, it is difficult to make any conclusion on the relationship between risk measures and ESG scores.

Although prior research has addressed the influence of corporate social responsibility (CSR) on perceived customer responses, it is not clear whether CSR affects market value of the firm. This study develops and tests a conceptual framework, which predicts that (1) customer satisfaction partially mediates the relationship between CSR and firm market value (i.e., Tobin’s q and stock return), (2) corporate abilities (innovativeness capability and product quality) moderate the financial returns to CSR, and (3) these moderated relationships are mediated by customer satisfaction. Based on a large-scale secondary data set, the results show support for this framework. Notably, the authors find that in firms with low innovativeness capability, CSR actually reduces customer satisfaction levels and, through the lowered satisfaction, harms market value. The uncovered mediated and asymmetrically moderated results offer important implications for marketing theory and practice.

We develop an analytical framework to investigate the competitive implications of personalized pricing technologies (PP). These technologies enable first-degree price discrimination: firms charge different prices to different consumers, based on their willingness to pay. We first show that, even though a monopolist makes a higher profit with PP, its optimal quality is the same with or without PP. Next, we show that in a duopoly setting, personalized pricing adds value only if it is associated with product differentiation. We then consider a model of vertical product differentiation, and show how personalized pricing on the Internet affects firms’ choices of quality differentiation in a competitive scenario. There are two equilibria. We find that, when the PP firm has a high quality both firms raise their qualities, relative to the uniform pricing case. Conversely, when the PP firm has low quality, both firms lower their qualities. While it is optimal for the firm adopting PP to increase product differentiation, the non-PP firm seeks to reduce differentiation by moving in closer in the quality space. Our model also points out firms’ optimal pricing strategies with PP, which may be non-monotonic in consumer valuations. Depending on the convexity of the marginal cost function, we outline the incentives of firms to deploy such technologies. Our model shows it is an optimal strategy for the low quality firm to adopt PP, if the other firm does not. Regardless of whether the low quality firm has PP, the high quality firm should adopt PP only if the cost function is not too convex. Next, if both firms acquire PP, then both firms earn lower profits than in the case where neither firm has PP. Essentially, they are trapped in a prisoner’s dilemma. Finally, we show that, consumer surplus is highest when both firms adopt PP. Thus, despite the threat of first degree price discrimination, personalized pricing with competing firms can lead to an overall increase in consumer welfare.

This paper investigates the impact of female analyst coverage on firms’ environmental and social (E&S) performance. Exploiting broker closures as a quasi-exogenous shock to analyst coverage, we show that firms with an exogenous drop in female analyst coverage subsequently experience a significant drop in E&S scores compared to those with an exogenous drop in male analyst coverage. To uncover the mechanisms, we develop novel machine learning models to analyze over 2.4 million analyst reports and 120,000 earnings call transcripts. Our analysis reveals that compared to their male counterparts, female analysts are more likely to discuss E&S issues, especially involving regulatory compliance, stakeholders, and the environment, in their research reports and during earnings conference calls, and that they exhibit distinct cognitive and linguistic patterns when discussing E&S issues. Moreover, female analysts are more likely to issue lower stock recommendations and target prices, following negative E&S discussions in their reports than their male counterparts. Finally, investors react significantly more to female analysts’ negative tones in discussing E&S issues. We conclude that gender diversity among analysts is a key driver of corporate E&S practices, and our findings shed light on the source of gender differences in skills in the equity analyst profession.

Exploring the minimum wage policy discontinuities at county borders, we find that minimum wage hikes induce industrial firms to pollute more and reduce their abatement efforts. State ownership mitigates these negative effects, suggesting its role in addressing externality. The adverse environmental impacts are attenuated by the staggered increase in pollution discharge fees across provinces. These effects are stronger for firms with higher minimum wage sensitivity, lower market power, and greater financial constraints, and for firms that are the subsidiaries of non-listed companies. Overall, our findings highlight the unintended environmental consequences of labor market policies.

This study leverages earnings conference call transcripts and the FinBERT machine learning model to measure greenwashing (GW) intensity across a broad sample of U.S. public firms from 2007 to 2021. We document an economy-wide increase in GW intensity following the 2015 Paris Agreement, with a significant rise in GW among fossil fuel and stranded asset industries. Higher GW intensity is linked to more future environmental incidents and EPA enforcement actions, and higher carbon emissions, but not to increased green innovation. GW is associated with lower cumulative abnormal stock returns post-earnings calls and poorer future operating performance, especially in firms with greater information asymmetry and weaker institutional monitoring. GW firms receive higher future environmental ratings, face lower forced CEO turnover, exhibit reduced CEO pay-for-performance sensitivity, and are more likely to link CEO pay to corporate environmental performance. Additionally, these firms show reduced risk-taking behaviors. Our findings suggest an agency motivation for GW, where managers engage in GW to enhance their job security and compensation at the expense of shareholders.

This paper investigates the effectiveness of shareholder strategies–divestment threats (exit) and active engagement (voice)–in driving socially responsible corporate behavior and the conditions under which they succeed. Using a novel classification of U.S. mutual funds based on their portfolio holdings and votes, I find that voice is generally effective, particularly when board directors are up for reelection. The exit strategy, which leverages the threat of stock price depreciation, is effective only in firms with high CEO wealth-performance sensitivity. These results suggest that the career concerns of management can drive pro-social change when shareholders demand it.

We analyze the stock market response to a comprehensive international sample of 1,560 corporate green bond announcements between January 2013 and January 2022. We do not find any significant market response to these green bond announcements. We conduct a battery of tests to check the robustness of this result, including a focus on the power of event study methodology as it relates to event window length. Also, we find that in the year of the green bond announcements, the abnormal operating performance of these announcing firms is significantly negative, which is consistent with the argument that managers of these firms are using the green bond announcements as a cover for their poor business performance.

This paper investigates the allocative efficiency of green finance instruments through a general equilibrium model with heterogeneous firms and financial frictions. We emphasize the impact of the timing of financial mechanisms—’ex-post’, such as carbon taxes, versus ‘ex-ante’, like green credit schemes—on the distribution of dirty capital and its environmental implications. Our study reveals that ex-post measures inadvertently direct dirty capital towards financially constrained firms, potentially exacerbating emission intensity. Such theoretical prediction explains empirical observations of Hartzmark and Shue (2023), indicating such strategies may be counterproductive. Conversely, ex-ante approaches yield beneficial redistributions. The study emphasizes the significance of incorporating the distributive effects of green finance tools into their design and advocates for a general equilibrium viewpoint to evaluate their effectiveness comprehensively, highlighting the pivotal role of instrument timing.

We examine the effects of diversity in the board of directors on corporate policies and risk. Using a multi-dimensional measure, we find that greater board diversity leads to lower volatility and better performance. The lower risk levels are largely due to diverse boards adopting more persistent and less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity also invest persistently more in R&D and have more efficient innovation processes. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal.

We explore the labor market effects of gender and race by examining board leadership appointments. Prior studies are often limited by observing only hired candidates, whereas the boardroom provides a controlled setting where both hired and unhired candidates are observable. Although diverse (female and minority) board representation has increased, diverse directors are significantly less likely to serve in leadership positions, despite possessing stronger qualifications than non-diverse directors. While specialized skills such as prior leadership or finance experience increase the likelihood of appointment, that likelihood is reduced for diverse directors. Additional tests provide no evidence that diverse directors are less effective.

This paper aims to summarize the state of academic knowledge surrounding the economics of environmental innovation. Following a definition of environmental technology, the paper enumerates and describes the obstacles or constraints to the development of eco-innovation. Key Findings: • Many of the challenges to innovation in general are mirrored and exaggerated in eco-innovation. • Environmental innovation is fraught with uncertainty: uncertainty about the end-product of a research process, uncertainty about the reception by the market, uncertainty about the ability to appropriate the returns to research while competitors try to produce similar results, and uncertainty about regulatory impacts on the research process and end-result. In addition, there is frequently uncertainty surrounding the pricing of competing as well as complementary goods. • On the other hand, uncertainty itself often stimulates innovation. Policymakers may very well be conflicted about how much structure to provide for innovators, if they truly thrive on some degree of uncertainty. This is further complicated by the fact that the appropriate policy response undoubtedly differs by industry, by technological problem, and even by time period. • This review of economic studies reveals five themes which affect the development of eco-innovations: intellectual property rights (e.g. patents), economies of scale, markets and incentives, system complexity and policy choices. • While developing nations frequently claim that strong intellectual property rights on carbon abatement technologies hinder developing countries’ greenhouse gas abatement efforts, it has been shown that IPRs do not constitute as significant a barrier as claimed since a variety of technologies exist for reducing emissions. In many cases, IPR-protected technologies are not necessarily more costly than those not covered. • Numerous studies have documented the reasons to encourage strong patent law. There is near universal agreement among economists that strong intellectual property rights are an essential prerequisite to the development of environmental technologies. Moreover, most firms indicate that IPRs are essential to the profitability of commercial research, so in its absence they simply will not commit research and development (R&D) funding to the market in question. At the same time, the value of patents, and other forms of protection, varies across industries and across innovations. • One of the challenges of sequential innovation lies in the difficulty in rewarding early innovators for the technological foundations they develop, while also allowing for the reward of subsequent innovators who improve and extend the original technology to new applications. This is particularly applicable in the context of new technologies, such as environmental technologies. • The challenge of achieving efficient scale and reducing per-unit production costs is critical to the success of most innovative products and processes. Since most innovations are subject to economies of scale (or increasing returns to scale), in which higher levels of output are associated with lower per-unit costs, larger firms may be better positioned to develop environmental technologies. • The greater the ease of development and extent to which the innovator will profit from the innovation and appropriate the benefits will both facilitate environmental innovation. However, in the case of eco-innovation, there is uncertainty about actual costs, consumer values, and policy platforms now and in the future. Moreover, the market is complicated by competing technologies (e.g.: fossil fuels) subject to negative externalities in which the user does not bear the full cost of the good. Further, the public goods nature of environmental technology prevents the user (and the innovator) from fully capturing the benefits of the innovation. • The role of federal regulations is critical to the development of eco-innovation. Environmental regulation might lead to cost-saving innovation if a) the fixed costs of innovation are lower than compliance plus production, or b) spillover effects make innovation strategically a bad idea for the firm but a good idea for society, or c) regulation helps to fix incentive problems between managers and owners, or d) regulation helps to clear information flow. • Given that knowledge has positive spillovers, benefits to those who bore none of the cost of acquisition, economists conclude that the amount of R&D provided by private markets will be lower than the socially optimal level. As such, questions emerge as to whether the returns to R&D are sufficient to encourage eco-innovation. • There is an important role for policy in the support or stifling of eco-innovation. Five themes emerge from the papers reviewed. First, there is a clear portfolio of policy alternatives to stimulate innovation or energy-related investment including taxes, subsidies, permits and standards/regulations. Second, there is strong evidence that regulatory policies can be very effective. Third, policy may serve to create a market for previously uncertain or ill-defined environmental commodities. Fourth, current policymakers are frequently unable to muster the political will to enact legislation that is pro-environmental innovation. Fifth, heterogeneity may be a desirable attribute in policy since many environmental issues are local or regional in nature, and thus require local knowledge and solutions. • Across numerous studies there are five themes which resonate with all economists as challenges to eco-innovation: intellectual property rights, economies of scale, markets and incentives, complex systems, and policy. The greatest potential for propelling innovation is usually found in market forces and incentives. Uncertainty, externalities, and subsidies to competing goods undoubtedly hinder the process, but the motivation provided by potential profit is undeniable. However, due to the spillovers associated with eco-innovation and the public goods nature of these technologies, there is a role for government intervention in order to spur an increase in environmental innovation. In this context it is essential for policymakers to find a balance: encouraging competition while guaranteeing a large market for minimum economic scale, reducing uncertainty about future resource prices while keeping alternatives open, offering rights of exclusion to intellectual property holders while not curtailing the ability of sequential innovators to build upon past successes, promoting social goals while respecting market pressures.

The social cost of carbon – or marginal damage caused by an additional ton of carbon dioxide emissions – has been estimated by a U.S. government working group at $21/tCO2 in 2010. That calculation, however, omits many of the biggest risks associated with climate change, and downplays the impact of current emissions on future generations. Our reanalysis explores the effects of uncertainty about climate sensitivity, the shape of the damage function, and the discount rate. We show that the social cost of carbon is uncertain across a broad range, and could be much higher than $21/tCO2. In our case combining high climate sensitivity, high damages, and a low discount rate, the social cost of carbon could be almost $900/tCO2 in 2010, rising to $1,500/tCO2 in 2050. The most ambitious scenarios for eliminating carbon dioxide emissions as rapidly as technologically feasible (reaching zero or negative net global emissions by the end of this century) require spending up to $150 to $500 per ton of reductions of carbon dioxide emissions by 2050. Using a reasonable set of alternative assumptions, therefore, the damages from a ton of carbon dioxide emissions in 2050 could exceed the cost of reducing emissions at the maximum technically feasible rate. Once this is the case, the exact value of the social cost of carbon loses importance: the clear policy prescription is to reduce emissions as rapidly as possible, and cost-effectiveness analysis offers better insights for climate policy than cost-benefit analysis.

Studying 30 countries, we find that the link between employee satisfaction and stock returns is significantly increasing in a country’s labor market flexibility. This result is consistent with employee satisfaction having greater recruitment, retention, and motivation benefits where firms face fewer hiring and firing constraints and employees have greater ability to respond to satisfaction. Labor market flexibility also increases the link between employee satisfaction and current valuation ratios, future profitability, and future earnings surprises, inconsistent with omitted risk factors and identifying channels through which employee satisfaction may affect stock returns. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

Using a novel dataset of negative news coverage of the environmental and social (E&S) practices of firms around the world, we show that customers and investors can provide market discipline and impose their ethical standards on firm policies. Investors sell firms with heightened E&S risk, especially if they are from E&S conscious countries or hold portfolios with high sustainability ratings. Similarly, heightened E&S risk is associated with a drop in firms’ sales in E&S conscious countries. This behavior of E&S conscious investors and customers leads to declines in stock prices, which push firms to improve their E&S policies in the years following negative realizations of E&S risk. Overall, our results indicate that customers and shareholders are able to impose their social preferences on firms, suggesting that market discipline works. Purchase – $8 CEPR Subscribers Download Add Paper to My Library Share: Does Money Talk? Market Discipline Through Selloffs and Boycotts CEPR Discussion Paper No. DP14098 53 Pages Posted: 15 Nov 2019 Nickolay Gantchev University of Virginia – McIntire School of Commerce; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) Mariassunta Giannetti Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance Rachel Li Securities and Exchange Commission (SEC) There are 2 versions of this paper Date Written: November 2019 Abstract Using a novel dataset of negative news coverage of the environmental and social (E&S) practices of firms around the world, we show that customers and investors can provide market discipline and impose their ethical standards on firm policies. Keywords: corporate governance, Corporate social responsibility, Culture, Environment, institutional investors JEL Classification: G15, G23, G30, M14 Suggested Citation: Gantchev, Nickolay and Giannetti, Mariassunta and Li, Rachel, Does Money Talk? Market Discipline Through Selloffs and Boycotts (November 2019). CEPR Discussion Paper No. DP14098, Available at SSRN: https://ssrn.com/abstract=3486249 Purchase – $8 CEPR Subscribers Download 16 References P R Abramson , R F Inglehart Value change in global perspective Posted: 1995 Crossref Florian Berg , Julian Kölbel , Roberto Rigobon Aggregate Confusion: The Divergence of ESG Ratings Forthcoming Review of Finance Pages: 48 Posted: 20 Aug 2019 Last revised: 26 Apr 2022

During the revelation of the Harvey Weinstein scandal and the re-emergence of the #MeToo movement, firms with a non-sexist corporate culture, proxied by having women among the five highest paid executives, earn excess returns of 1.3% relative to firms without female top executives. These returns are driven by changes in investor preferences towards firms with a non-sexist culture. Institutional ownership increases in firms with a non-sexist culture after the Weinstein/#MeToo events, particularly for investors with larger holdings and investors with a lower ESG focus ex-ante. Firms without female top executives improve gender diversity after these events, particularly in more sexist states and in industries with few women executives. Our evidence attests to the value of having a non-sexist corporate culture, and indicates that changes in societal norms towards women are permeating into capital markets and corporations.

This paper develops a method to separately measure a company’s efforts in substantive environmental improvements (“walk”) and mere promotion of a green image (“talk”) by analyzing online job postings. Walk efforts positively predict future environmental performance and data disclosure, while talk efforts do not. Applying this method reveals that sustainable mutual funds in the EU and US hold higher ownership stakes in companies with higher talk efforts, and three major ESG rating agencies award greener scores to these companies, controlling for walk efforts. Evidence suggests sustainable mutual funds invest in companies with higher talk efforts to attract higher fund flows.

Are investors’ preferences for responsible investing affected by their idiosyncratic personal experiences? Using a comprehensive dataset with hospital visits and information on portfolio holdings by retail investors in Denmark, we show that when an investor’s child is diagnosed with a respiratory disease, the investor decreases (increases) portfolio weights of “brown” (“green”) stocks but does not alter their holdings of ESG funds. Consistent with parents attributing respiratory diseases to air pollution, we find no effects for non-respiratory diseases. The results are stronger for more severe diseases and are driven by parents who live with their children.

The operation of residential buildings (our homes) is responsible for roughly 22% of the global energy consumption and 17% of the CO2 emissions. We study the effects of a regulatory intervention aiming to reduce carbon emissions by requiring privately rented properties to satisfy minimum energy efficiency standards. The regulation triggered significant investments in the rental sector. However, the environmental gains were smaller, limited by the use of more polluting energy sources. Regulatory interventions that target carbon emissions directly may be more effective in tackling the climate challenge.

In the face of rising climate risk, financial institutions may adapt by transferring such risk to securitizers that have the skill and expertise to build diversified pools, such as Mortgage-Backed Securities. In diversified pools, exposure to climate risk may have a small impact on performance metrics such as deal losses, yield-to-maturity, and total returns, depending on the degree of spatial correlation and concentration. This paper designs a novel approach for the spatial diversification of climate risk in Mortgage-Backed Securities as spatial portfolios of mortgage cash flows. First, it builds a data set of the securitization chain from mortgage-level to MBS deal-level cash flows. Wildfires lead to higher rates of prepayment and foreclosure at the mortgage level, and larger losses during foreclosure sales. At the MBS deal level, a lower spatial concentration of dollar balances (lower spatial dollar Herfindahl), a lower spatial correlation in wildfire events (within-deal correlation), leads to a lower exposure to wildfire events. These quantifiable metrics of diversification identify those existing deals whose design makes them resilient to climate change. Second, this paper builds optimal `counterfactual’ deals by finding the portfolio weights in a mean-variance framework that trades off return and risk. Extrapolating wildfire risk using a wildfire probability model and temperature projections in 2050, the paper provides and implements a portfolio diversification algorithm that builds climate-resilient MBSs whose returns are minimally impacted by wildfire risk even as they supply mortgage credit to wildfire prone areas.

The article refers to research by Stephen Barley (2007) and replies to criticism by Peter Edward and Hugh Willmott concerning the authors’ own research on the political aspects of corporate social responsibility. The Barley study suggests that business’s influence on politics can negatively impact representative democracy. The reply comments on private- and public-sector cooperation, economic theory that separates the sectors’ respective activities, conditions that maintain legitimacy for the social institutions of business and government, and voluntary philanthropy.

This paper examines the effects of targeted credit rationing by banks on firms likely to generate negative externalities. We exploit an initiative of the U.S. Department of Justice, labeled Operation Choke Point, which compelled banks to limit relationships with firms in industries prone to fraud and money laundering. Using supervisory loan-level data, we find that, as intended, targeted banks reduce lending and terminate relationships with affected firms. However, most firms fully substitute credit through non-targeted banks under similar terms. Overall, the performance and investment of these firms remain unchanged, suggesting that targeted credit rationing is widely ineffective in promoting change.

For generations, marginalized communities have been impacted by discriminatory land use, zoning, and property valuation policies, from redlining in the 1930s to the siting of undesirable land uses that persists today. Because of these policies, marginalized communities are forced to contend with low property values, substandard infrastructure, and increased health risks. However, the very same mechanisms that created these injustices may now be key to addressing them. This Article introduces “greenlining” as a land use planning mechanism that seeks to remediate historical housing, siting, and economic disparities while forging a path towards energy and environmental justice. Greenlining, the productive and equitable reimagining of redlining, uses the the tripartite structure of sustainability – environment, economy, and equity. And where redlining was a marker for discrimination and injustice, greenlining lies at the crossroads of land use planning and environmentalism, serving the dual purpose of mitigating climate change and prioritizing social justice. Ultimately, greenlining is about investing in marginalized communities that have borne the brunt of regulatory and environmental harms while equitably grappling with the most pressing issue of our time: climate change.

Inter-relationship between Business Ethics and Corporate Governance among Indian companies. Every organization, as they grow has many stakeholders like shareholders, employees, customers, vendors, community, etc. For survival and growth, they have to rely upon healthy relations with all these stockholders. Hence organizations need to provide good returns for shareholders but also good jobs for employees, reliable products for consumers, responsible relations with the community and a clean environment. Business ethics is the application of general ethical principles to business dilemmas and encompasses a broader range of issues and concerns than laws do, as everything that is legal is not ethical. Ethics involves learning what is right or wrong, and then doing the right thing — but “the right thing” is not nearly as straightforward. Business Ethics has the following purposes: – To give people the tools for dealing with moral complexity in business – Business decisions have an ethical component – Ethical implications must be weighed before acting Corporate governance is concerned with the ownership, control and accountability of companies, and how the corporate pursuit of economic objectives relates to a number of wider ethical and societal considerations. It is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. Good Corporate Governance is key to Growing Profits and Reputation. It represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. Accountability is a key element as well as requirement for corporate governance, fortifying the latter in such a way that it provides a transparent template for governing critical decisions, procedures, and activities. Corporate Governance deals with the questions: (1) Who benefits from corporate decisions/senior management actions? (2) Who should benefit from corporate decisions/senior management actions? There are a number of reasons why businesses should act ethically .As behavior is based on values priorities, a mutual effort at all levels to deal with corporate ethics begins with a clear understanding of core values, both individually and organizationally. Good corporate governance begins with a company’s own internal practices and policies. While corporate governance issues are common across organizations, each company requires governance principles that are unique in their approach. Good governance is, ultimately, the sine qua non for continued growth and prosperity. Corporate governance ensures that long term strategic objectives and plans are established and that the proper management structure is in place. Companies that provide good governance, both in terms of practices and results can expect the backing not only of investors but of customers too. Corporate Governance represents the moral framework, the ethical framework and the value framework under which an enterprise takes decisions. In the long run ethical behavior has a positive impact on the company’s performance. This paper discusses the elements of corporate governance, inter-relationship between business ethics and corporate governance with reference to some of the Indian companies over the years and their impact in this era of globalization and liberalization.

What do markets for voluntary climate protection imply about people’s valuations of environmental protection? I study this question in a large-scale field experiment (N=255,000) with a delivery service, where customers are offered carbon offsets that compensate for emissions. To estimate demand for carbon mitigation, I randomize whether the delivery service subsidizes the price of the offset or matches the offset’s impact on carbon mitigation. I find that consumers are price-elastic but fully impact-inelastic. This would imply that consumers buy offsets but their willingness to pay (WTP) for the carbon it mitigates is zero. However, I show that consumers can be made sensitive to impact through a simple information treatment that increases the salience of subsidies and matches. Salient information increases average WTP for carbon mitigation from zero to 16 EUR/tCO2. Two complementary surveys reveal that consumers have a limited comprehension of the carbon-mitigating attribute of offsets and, as a result, appear indifferent to impact variations in the absence of information. Finally, I show that the widely-used contingent valuation approach poorly captures revealed preferences: Average hypothetical WTP in a survey is 200 EUR/tCO2, i.e., 1,150% above the revealed preference estimate.

In theory, a cost of capital channel can incentivize green investments like a carbon tax. This channel requires that firms perceive the cost of green capital as lower than that of brown capital. Using hand-collected data, we show that green firms have indeed perceived their cost of capital to be 1 percentage point lower since 2016, when climate concerns by financial investors and governments surged. Moreover, some energy firms have used a lower cost of capital for their green divisions. The findings suggest that the cost of capital can incentivize capital reallocation toward greener investments across firms and within firms.

We study how institutional investors that join climate-related investor initiatives decarbonize their equity portfolios. Decarbonization can be achieved either by re-weighting portfolios towards lower carbon emitting firms or alternatively via targeted engagements with portfolio companies to reduce their emissions. Our findings indicate that portfolio re-weighting is the predominant greening strategy by climate-conscious investors, in particular by those based in countries with carbon emissions pricing schemes. We do not uncover much evidence of engagement even after the 2015 Paris Agreement. Furthermore, we find no evidence that climate-conscious investors allocate capital towards firms developing climate patents, but they do re-weight towards firms starting to generate green revenues. Overall, our analysis raises doubts about the effectiveness of investor-led initiatives in reducing corporate emissions and helping an all-economy transition to “green the planet”.

Due to climatic changes across the globe, alignment of processes and products according to international environment standards is a rising concern for business stakeholders. Though this reform process to minimize environmental impact is occurring across different industries and countries but at a varying pace. Therefore, environmental management is still naïve and often compromised. If it is left unaddressed, it would lead to massive protests and social movements in future which will be messy to deal with, since climate change is occurring at an alarming pace. Moreover, the environmental consciousness is rising among masses, it is inevitable to deceive stakeholders for long time in this information era where controlling information is impossible. Corporate scandals and information/data leaks regarding greenwashing can lead to social protests and corporate defamation. Although in most of the countries environmental reporting is not a legal requirement however it is a societal requirement in different communities. Organizations use obfuscation eco-friendly claims, vague visual imagery, selective disclosure of corporate reports, and misleading communication modes to intentionally portray false environment-friendly claims of poor environmental performance to maintain positive social image by deceiving stakeholders. These symbolic strategic practices have stark difference with the real environmental impact. human resource managers and employees play significant role in developing and implementing such environment friendly organizational culture. Therefore, human resource function can facilitate by designing systems to build green organizational culture in organizations. In this research paper the pre-existing literature on green organizational culture in organizations is be reviewed, since in the last decade many researches were conducted on this issue. This review will give a holistic view of existing literature to the future researchers and will help them to identify research gap. Moreover, it will help practitioners and decision makers in knowing the advantages and disadvantages of green culture in organizations, so that they will understand whole impact of opting it.

The pace of biodiversity loss requires drastic shifts in conservation efforts that carry substantial costs. We investigate how the financial market prices such conservation costs exploiting the “Green Shield Action,” a major regulatory initiative launched by the Chinese central government in 2017 to enforce biodiversity preservation rules in national nature reserves. We document that, while improving local biodiversity, the initiative led to a significant increase in bond yields for Chinese municipalities with national nature reserves. Evidence suggests that these effects are driven by expected increases in transition costs resulting from shutting down illegal economic activities within reserves and local public spending on biodiversity following the initiative. Overall, our results indicate that investors show little consideration beyond financial payoffs towards endeavors counteracting biodiversity loss. Institutional subscribers to the NBER working paper series, and residents of developing countries may

With the rising support for stakeholder capitalism and at the urging of its advocates, companies have been increasingly using environmental, social, and governance (ESG) performance metrics for CEO compensation. This Article provides a conceptual and empirical analysis of this trend, and exposes its fundamental flaws and limitations. The use of ESG-based compensation, we show, has at best a questionable promise and poses significant perils. Based partly on an empirical analysis of the use of ESG compensation metrics in S&P 100 companies, we identify two structural problems. First, ESG metrics commonly attempt to tie CEO pay to limited dimensions of the welfare of a limited subset of stakeholders. Therefore, even if these pay arrangements were to provide a meaningful incentive to improve the given dimensions, the economics of multitasking indicates that the use of these metrics could well ultimately hurt, not serve, aggregate stakeholder welfare. Second, the push for ESG metrics overlooks and exacerbates the agency problem of executive pay, which both scholars and corporate governance rules have paid close attention. To ensure that they are designed to provide effective incentives rather than serve the interests of executives, pay arrangements need to be subject to effective scrutiny by outsiders. However, our empirical analysis shows that in almost all cases in which S&P 100 companies use ESG metrics, it is difficult if not impossible for outside observers to assess whether this use provides valuable incentives or rather merely lines CEO’s pockets with performance-insensitive pay. The current use of ESG metrics, we conclude, likely serves the interests of executives, not of stakeholders. Expansion of ESG metrics should not be supported even by those who care deeply about stakeholder welfare. This paper is part of a larger research project of the Harvard Law School Corporate Governance on stakeholder capitalism and stakeholderism. Other parts of this research project include The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita, Will Corporations Deliver Value to All Stakeholders? by by Lucian A. Bebchuk and Roberto Tallarita, For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, Stakeholder Capitalism in the Time of COVID by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, Does Enlightened Shareholder Value Add Value? by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita, and How Twitter Pushed Stakeholders Under The Bus by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo.

Can environmentally-minded investors impact the cost of capital of green firms even when they invest through financial intermediaries? To answer this and related questions, I build an equilibrium intermediary asset pricing model with three investors, two risky assets, and a riskless bond. Specifically, two heterogeneous retail investors invest via a financial intermediary who decides on the portfolio allocation that she offers between a green and a brown equity. Both retail investors and the financial intermediary can tilt towards the green asset, beyond pure financial considerations. Perhaps surprisingly, the green retail investor can have significant impact on the pricing of green assets, even when she invests via an intermediary who does not tilt: a sizable green premium –that is, a lower cost of capital– can emerge on the equity of the green firm. This good news comes with important qualifications, however: the green retail investor has to take large leveraged positions in the portfolio offered by the intermediary, her strategy must be inherently state-dependent, and economic conditions or the specification of preferences can overturn or limit the result. When the financial intermediary decides (or is made) to tilt instead, the impact on the green premium is substantially larger, although it is largest when preference are aligned with retail investors. I also study what happens when the green retail investor does not know the weights in the portfolio offered by the intermediary, the potential impact of greenwashing, and the effect of portfolio constraints. Taken together, these findings highlight the central role that financial intermediaries can play in channeling financing (or not) towards the green transition.

Making India a $20 Trillion Economy from a $2 Trillion economy requires tremendous amount of effort from all concerned especially from the government. The fundamental requirements for any real growth are Accountability, Efficiency, Transparency and Trust. They are interconnected. In today’s competitive world, it is the technological strength of a nation that decides its standing in the global arena. Technology has become the prime mover behind growth and prosperity. A nation that masters technology thus derives competitive advantage and respect. Information Technology has made it possible to make information and services reach to the ordinary men and women even in remote areas, easily and effectively. Availability of information is the key to empowerment of the stakeholders. This also reduces the scope for discretion and manipulation. IT is a great enabler for empowerment, equity and efficiency. Every household and every individual needs to be digitally empowered. Services need to be digital by default. That means that existing services that aren’t digital needs to be redesigned completely so that the customers’ needs are central and the best use of digital technology can be made throughout the entire process. Community engagement is a critical part of democratic process. We need to engage, to build trust and inform service design. Digital channels such as social media allow us to do this in ways that have never been possible before. All government transactions needs to be transparent and delivered through technology with the least cost for the citizen. Good practices that are already implemented by various states can be modified to suit the needs of different states and regions. Most important is that we need to standardize all the products without affecting the individual needs so that the same data can be used for multiple functions. The government while spending on e-Governance applications should also see to it that its citizens, who are the ultimate beneficiaries of those applications, come to know about them and, more importantly, are given incentives to actually use them. E-Governance is supposed to cut government expenditure and wastage of public funds and ensure corruption-free governance while improving the productivity of government employees. Government of India has launched the initiative “Digital India”, a programme to transform India into a digitally empowered society and knowledge economy, with the focus on making technology central to enabling change. It pulls together many existing schemes and are planned to be implemented in a synchronized manner. While many elements are only process improvements with minimal cost, the schemes are being restructured and re-focused in a mission mode and are trans-formative in totality. The three Key Areas focused by government of India in the Vision of Digital India are: Digital Infrastructure as a Utility to Every Citizen Governance & Services on Demand Digital Empowerment of Citizens The nine Pillars of Digital India identified by the government are: Broadband Highways Universal Access to Phones Public Internet Access Programme E-Governance – Reforming government through Technology eKranti – Electronic delivery of services Information for All Electronics Manufacturing –Target NET ZERO Imports IT for Jobs Early Harvest Programmes This paper would look upon challenges and changes needed for translating this vision into reality and also the associated benefits that may accrue in doing so, like giving impetus to the “Make in India” dream for improving the ease of doing business in India thus attracting foreign capital. Full paper available at https://www.researchgate.net/publication/295525668_Making_India_Digital_by_Default

This paper studies the association between hedge fund activism and firm value, using matching procedures to mitigate the selection effects of which firms are chosen as targets by activist hedge funds. We find that targeted firms improve less in value (Q) subsequent to the start of activism than ex-ante similarly poorly performing control firms that are not subject to activist campaigns. Further, long-term abnormal stock returns of both target and control firms are likewise positive and significant. However, activist hedge funds have strong stock selection skills as well as strong trading skills that allow them to outperform.

There is significant heterogeneity in ESG funds’ incentives to engage with portfolio firms. If funds view ESG as a value driver, then these incentives will affect funds’ behavior and thus their impact on firms. We compare ESG funds with similar levels of ESG investments but different incentives to engage. We find that funds with higher incentives to engage, i.e., committed ESG funds, conduct more ESG-related information acquisition, pursue longer-term investment strategies, engage more intensely on ESG issues, and have greater real impacts. Moreover, committed ESG funds have outperformed other ESG funds within subportfolios with higher and more effective ESG engagement.

Europe has recently seen a marked increase in ambitions to deploy carbon capture and storage, with over 50 projects in various stages of planning across the region. This renewed interest is in large part linked to legally binding climate targets to reach ‘net zero’ by 2050 or sooner, combined with growing recognition of the critical contribution the technology can make towards industrial decarbonisation, atmospheric CO2 removals, and the production of low-carbon hydrogen. Despite this trend, most countries still lack appropriate policy support and investable business models required to realise commercial projects. The innovation policy framework developed by Clean Air Task Force aims to help shape policies to facilitate the rapid scale-up of low-carbon technologies from the research stage to widescale use, recognising that each development stage requires tailored policy support, as well as overarching ‘success factors’ such as faster project deployment times, access to finance, and adequate infrastructure (Figure). In order to apply this approach to the development of carbon capture and storage in Europe, Clean Air Task Force conducted a series of interviews with over 30 project developers and other stakeholders in the region, identifying key policy and regulatory barriers faced by the current wave of initiatives – most of which aim to come online by 2030 or earlier. A key enabling characteristic of many of Europe’s carbon capture projects is their separation of the commercial framework for CO2 capture from that of transport and storage, with the expectation that emerging ‘open-access’ storage sites will provide CO2 offtake for a fee. This model is also typical of several ‘cluster’ initiatives, in which a transport and storage infrastructure operator coordinates to service emitters within a localised industrial region. However, emitters must still have access to durable revenue streams which adequately compensate the capital and operating expenses associated with both carbon capture and CO2 offtake. While the EU’s Innovation Fund is a valuable source of project funding, it is heavily oversubscribed, and to date, the Netherlands SDE++ scheme is the only national-level incentive which offers repeatable, long-lasting support for carbon capture and storage. Similar business models will be required at the national level in any Member State aiming to include carbon capture in its decarbonisation strategy, particularly while carbon price signals remain unpredictable and inadequate. Targeted incentives are also necessary for carbon removals projects, together with appropriate valuation of the permanence and scale enabled by technology-based solutions such as direct air capture with geological storage. At the same time, development of storage capacity lags well behind projected demand, and some degree of direct public financing of this critical infrastructure is likely necessary to derisk investment and ensure timely delivery. As early storage site development has been concentrated in the North Sea, several projects without direct access to this resource face additional risks or delays from regulatory barriers to cross-border storage, which currently requires bilateral agreements between countries. Further barriers to cross-border networks may be introduced by a lack of technical standardisation between different transport and storage providers. As the technology moves beyond nth-of-a-kind projects, deployment should be increasingly driven by higher carbon prices and growing demand for low-carbon products (including cement, steel, and chemicals) and services (such as waste disposal) – this demand can be fostered through end-use standards and robust carbon accounting. CO2 transport and storage infrastructure can also expand beyond the North Sea, to Central, Eastern, and Southern Europe, through effective capacity building, sharing of best practice and adoption of proven policies. Ultimately, Europe must aim to create a flexible, international market for CO2, in which emitters can easily shift between storage providers, reducing downtime and the risk of stranded assets throughout the value chain. For this transnational endeavour to be successful, the institutions of the European Union should play a leading role, starting with a dedicated carbon capture and storage strategy in close collaboration with Member State governments. Such a strategy would establish deployment targets for CO2 capture and removal and help coordinate the creation of optimised, open-access transport and storage infrastructure for the whole region. This would ensure carbon capture and storage offers a viable decarbonisation pathway to all Member States that require it, while sending an important signal to developers, investors, and the public that the technology is indispensable for achieving net zero. With a view to informing both EU and Member State carbon management strategy, this paper presents the findings from project engagement and analyses the barriers and drivers for rapid scale-up of carbon capture and storage in the context of the innovation policy framework.

This paper analyzes the counterproductive effects associated with using budgets or targets in an organization’s performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to game the system and in doing so to destroy value in two main ways: 1. both superiors and subordinates lie in the formulation of budgets and therefore gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organization, and 2. they game the realization of the budgets or targets and in doing so destroy value for their organizations. Although most managers and analysts understand that budget gaming is widespread, few understand the huge costs it imposes on organizations and how to lower them. My purpose in this paper is to explain exactly how this happens and how managers and firms can stop this counterproductive cycle. The key lies not in destroying the budgeting systems, but in changing the way organizations pay people. In particular to stop this highly counterproductive behavior we must stop using budgets or targets in the compensation formulas and promotion systems for employees and managers. This means taking all kinks, discontinuities and non-linearities out of the pay-for-performance profile of each employee and manager. Such purely linear compensation formulas provide no incentives to lie, or to withhold and distort information, or to game the system. While the evidence on the costs of these systems is not extensive, I believe that solving the problems could easily result in large productivity and value increases – sometimes as much as 50 to 100% improvements in productivity. I believe the less intensive reliance on such budget/target systems is an important cause of the increased productivity of entrepreneurial and LBO firms. Moreover, eliminating budget/target-induced gaming from the management system will eliminate one of the major forces leading to the general loss of integrity in organizations. People are taught to lie in these pervasive budgeting systems because if they tell the truth they often get punished and if they lie they get rewarded. Once taught to lie in this system people generally cannot help but extend that behavior to all sorts of other relationships in the organization. ———– An executive summary of this paper entitled “Corporate Budgeting Is Broken, Let’s Fix It”, Harvard Business Review, pp. 94-101, November 2001, can be downloaded at no charge from Social Science Research Network Electronic Library at: http://papers.ssrn.com/paper=321520

We offer new evidence on how the application of environmental, social, and governance (ESG) criteria has affected international stock returns. We estimate the market-based equity greenium in a cross-section of 21,902 firms from 96 countries. We find reliable evidence that green stocks earned higher returns than brown stocks around the world. This outperformance is associated with lower stock returns of energy firms but not higher returns of technology stocks. Decomposing this outperformance further into five regions, including North America, Europe, Japan, Asia Pacific, and Emerging Markets, demonstrates that the equity greenium effect mostly occurs in North America and during the period before 2016. Most of the equity greenium performance cannot be explained by exposures to return factors prominent in the asset pricing literature.

We investigate the heterogeneity in investor demand for sustainable equity investing and study its implications. We measure firm-level sustainability across three dimensions: third-party environment scores, emissions, and green patents. Separately estimated institutional investor demands are sensitive to scores and emissions, but not to green patents. We then aggregate these heterogeneous demands in an equilibrium framework to draw implications for the effectiveness of sustainable investing: (i) price-elastic investors do not “undo” effects of sustainable investors, (ii) investor pressure for sustainability only weakly predicts future improvements in firm sustainability, and (iii) incorporating green patents into ESG ratings can be a valuable adjustment.

We split green innovation into pure green and fuel efficiency patent filings and study its effects on carbon emissions in a large sample of global firms. Despite a steady rise in green R&D, we find that green innovation does not predict future reductions in emissions of innovating firms. Fuel efficiency innovation improves emission intensity but is also associated with higher future sales and investments, resulting in higher future emissions. At the industry level, countervailing effects in terms of emission intensity improvements and changing market shares of innovators on net result in green (fuel efficiency) innovation predicting higher (lower) future emissions.

We study why investors are willing to pay higher fees for sustainable investments using large-scale online experiments with individual investors across five European countries. We focus on two potential explanations – investors’ social preferences and limited financial literacy. We find that, across all countries, social preferences significantly contribute to the share of sustainable investments in investment portfolios. However, social preferences do not significantly influence investors’ sensitivity to fees. Instead, financially illiterate investors pay higher fees, because they pay less attention to fees and (wrongly) believe funds with higher expenses outperform after fees. These results have important implications for financial regulation.

Utilizing a CEO fixed-effects approach, we find that latent managerial characteristics account for a substantial portion of firm-level variation in ESG outcomes. Our analysis shows that a CEO’s work experience at a not-for-profit (NFP) organization is strongly correlated with these fixed effects and is associated with superior ESG performance. Notably, one in three S&P 1500 companies is now led by a CEO with NFP experience, reflecting a four-fold increase over the past two decades. Our findings highlight the evolving characteristics of top managers in response to the growing prominence of ESG.

We explore the relationship between US mutual fund managers’ incentives to deliver high returns and their portfolio Environmental, Social, and Governance (ESG) performance. Mutual funds with managerial ownership (“skin in the game”) exhibit lower ESG performance than otherwise similar funds. This effect is stronger for managers paid to maximize assets under management. Co-investing managers are less likely to buy high-ESG stocks after exogenous shocks in the flow incentives to hold such assets. Overall, the results suggest that fund managers, on average, do not consider ESG selection an enhanced form of portfolio management to maximize risk-adjusted returns.

Minority operated hedge funds attract lower start-up capital and investor flows. Yet they deliver higher alphas, Sharpe ratios, and information ratios relative to non-minority operated hedge funds. Moreover, minority managers are more likely to attend prestigious colleges, receive specialized education, eschew downside risk, and exhibit trustworthiness. Racial homophily drives investors’ preference for non-minority funds. An event study of minority manager fund transitions, instrumental variable regressions that exploit childhood racial imprinting, and an analysis of minority managers with non-White sounding first names address endogenity. Our results reveal that racial minorities face significant taste-based discrimination in asset management.

Institutional investors holding firms hit by climate-related disasters vote more in favor of climate-related shareholder proposals at their other portfolio firms. This relation arises via investors becoming more active voters on climate-related proposals and is strongest following recent exposure to large value-relevant disasters, during periods of elevated attention to climate risks, and for votes occurring at carbon-intensive firms. Aggregating to the firm level, firms with impacted investors exhibit lower climate change sentiment on conference calls and a longer-term decrease in emissions. Thus, climate disasters ripple through ownership networks to influence corporate behavior toward environmental responsibility.

This paper investigates how a climate shock is propagated through the banking system. We exploit El Niño, a recurring natural phenomenon inducing quasi-random variation in temperatures across the US. El Niño leads to lower house prices and mortgage lending in counties experiencing temperature increases. Higher temperatures increase water and soil salinity, which negatively affects both crop yields and local natural amenities. Banks exposed to El Niño reduce their mortgage lending even in counties unaffected by temperature increases. Using a LASSO analysis we find that banks with lower operating leverage (i.e., lower expenses on physical premises) are more climate-resilient.

We study manufacturing firms’ production responses to an emission capping regulation. Firms lower emissions by improving energy efficiency, substituting towards cleaner fuels, and moving from producing electricity to purchasing it from the grid. They move away from coal-intensive products and increase their abatement expenditures. These changes improve firm productivity, supporting theories that regulation prompts technology adoption. In the aggregate, we document lower product variety and an altered firm-size distribution, driven by a reduced likelihood of business formation. Our findings highlight the mechanisms behind how mandated pollution reduction can be effective and the costs it imposes, suggesting a loss of agglomeration externalities.

Inspired by Roy (1951), we analyze whether firms competitively sort into transition and status quo technologies, resulting in positive returns (i.e., the best fishers fish, while the best hunters hunt). We apply latent variable techniques on novel data of firm-edits of environmental and workforce fundamentals, focusing on industrial sectors. We find +18-83 basis-point equity price reactions to information that firms competitively sort. However, Roy sorting to transition and status quo opportunities is reduced by 7.7% and 13.6%, respectively, in high net carbon tax geographies, implying value relevance of Roy sorting unless facing net carbon tax rates above 187 euros/ton.

Firms that obtain assurance for their carbon accounting report on average a 9.5% higher Scope 1 carbon intensity and 13.7% higher Scope 1 absolute emissions than their peers in the first year of obtaining assurance. This indicates that firms underestimate their emissions without assurance. We only capture the difference before and after obtaining assurance for the firms that have probably the most advanced carbon accounting processes in place as obtaining assurance is voluntary in our sample. It follows that the increase most likely underestimates the actual gap between assured and non-assured carbon emissions. Moreover, when controlling for assurance, we do not find evidence that SBTi target-setters reduce their future emissions. Instead, only the subset of firms that obtain assurance reduce their future Scope 1 emissions over our sample. This has implications for portfolio managers and ESG raters as taking reported carbon emissions at face value would lead to penalizing firms that are more serious about their carbon accounting as well as reductions. It also calls for mandatory assurance when carbon reporting is mandatory and when reported emissions are generally relied upon in regulation.

We use plant-level data from the U.S. Census of Manufacturers to study the short- and long-run effects of temperature on manufacturing activity. We find that high-temperature shocks significantly increase energy costs and lower productivity for small plants, while large plants are mostly unaffected. Commuting zones with higher increases in average temperatures between the 1980s and the 2010s experience a decline in the number of small plants, reallocation of labor from small to large plants, and higher local labor market concentration. Differences in costs per unit of energy, managerial skills, and access to finance contribute to explaining our results.

In theory, a cost of capital channel can incentivize green investments like a carbon tax. This channel requires that firms perceive the cost of green capital as lower than that of brown capital. Using hand-collected data, we show that green firms have indeed perceived their cost of capital to be 1 percentage point lower since 2016, when climate concerns by financial investors and governments surged. Moreover, some energy firms have used a lower cost of capital for their green divisions. The findings suggest that the cost of capital can incentivize capital reallocation toward greener investments across firms and within firms.

Investors’ appetite for green finance increased considerably in particular after the Paris Agreement. However, the lack of a standardized definition of green and non-green activities represents a main obstacle to understand under which conditions a green portfolio may outperform the market. We investigate to what extent the European stock market prices climate transition risk, testing different classifications of “green” and “high-carbon” used by investors and financial authorities, including Greenhouse gas emissions intensity and carbon footprint, ESG, the EU Taxonomy, and the science-based classification Climate Policy Relevant Sectors (CPRS). As a difference from standard market-based classifications, the CPRS takes into ac- count forward-looking dimensions of climate transition risk exposure, i.e. energy technology profile, fossil input substitutability and cost of policy and regulation. We develop portfolios and green-minus-brown factors and we analyse the market pricing in an augmented CAPM and Fama-French models. The results confirm that different classifications lead to very different evidence on greenium, i.e. higher expected returns for high-carbon assets w.r.t. green assets. Interestingly, we find that the existence of a greenium disappears when considering forward-looking climate risk characteristics captured by combining the CPRS and the EU Taxonomy. Our approach allows for better hedging of climate transition risk emerging from pol- icy and regulatory announcements, and to consider policy uncertainty in climate- aligned portfolio construction.

Purpose The study explores integrating social responsibility, environmental sustainability, and financial viability (the triple bottom line) within organizations. It emphasizes HR’s role in aligning people, planet, and profits for resilience and sustainable development. Design/methodology/approach To address research gaps, our study investigates HR’s involvement in implementing sustainable HR policies using descriptive research and quantitative analysis methods like regression and ANOVA to explore variable relationships. Findings Findings reveal strong positive links between social responsibility(people), environmental sustainability (planet), financial profitability(profits), and organizational resilience, underscoring their crucial role in enhancing an organization’s ability to tackle challenges and promote sustainable practices within organizational frameworks. Research limitations/implications The constraints of this study encompass the restricted sample size from various industries. Depending solely on quantitative methods may overlook qualitative aspects, while lacking a longitudinal view limits understanding of evolving sustainable HR practices. Exploring additional influential variables is essential. Practical implications The paper emphasizes HR’s role in driving innovative sustainable development within organizations, focusing on talent management, diversity fostering, sustainability culture, eco-friendly policies, and fostering an engaged, socially responsible, and innovative workforce to enhance organizational resilience. Social implications Sustainable HR strategies carry wide societal impacts, reshaping norms by championing ethical leadership, community engagement, and diversity. These efforts influence attitudes toward sustainability and corporate responsibility, while environmental initiatives raise societal awareness, highlighting HR’s influence beyond organizations. Originality This study brings novel insights into HR’s role in integrating social responsibility, environmental sustainability, financial profitability, and demographic influences for strategic HR decision-making in Sustainable Development of the organization.

Concerns about climate risk suggest it should aect risk assessment and pricing of corporate, securities, particularly for rms facing potential regulatory restrictions. Employing a shock to, expected climate regulations, we nd support for this hypothesis given our evidence that climate, regulatory risks causally aect bond credit ratings and yield spreads. Moreover, a structural, credit model indicates the increased spreads for high carbon issuers, especially those located, in stricter regulatory environments, derive from changes in rms’ asset volatilities rather than, asset values, highlighting that regulatory uncertainty aects security pricing. The results have, important implications for corporate decisions, portfolio management, and policymaking.

We empirically analyze firm-level uncertainty generated from extreme weather events, guided by a theoretical framework. Stock options of firms with establishments in a hurricane’s (forecast) landfall region exhibit large implied volatility increases, reflecting significant uncertainty (before) after impact. Volatility risk premium dynamics reveal that investors underestimate such uncertainty. This underreaction diminishes for hurricanes after Sandy, a salient event that struck the U.S. financial center. Despite constituting idiosyncratic shocks, hurricanes affect hit firms’ expected stock returns. Textual analysis of calls between firm management, analysts, and investors reveals that discussions about hurricane impacts remain elevated throughout the long-lasting high-uncertainty period after landfall.

Is climate transition risk factored into sovereign bond markets? We find that carbon dioxide emissions, natural resources rents, and renewable energy consumption, as measures of transition risk, significantly impact yields and spreads. Countries with lower carbon emissions incur a lower borrowing cost. Advanced countries reducing their earnings from natural resource rents and increasing renewable energy consumption are associated with lower borrowing costs, which differs from the effects in developing countries. Given the threat climate change poses to the global economy and the fast materialisation of transition risk, we advocate an increase in the significance of climate transition risk factors as determinants of sovereign bond markets.

Municipal bond markets begin pricing sea level rise (SLR) exposure risk in 2013, coinciding with upward revisions to worst-case SLR projections and accompanying uncertainty around these projections. The effect is larger for long-maturity bonds and is not solely driven by near-term flood risk. We use a structural model of credit risk to quantify the implied economic impact and distinguish the effects of underlying asset values and uncertainty. The SLR exposure premium exhibits a different trend from house prices and is unaffected by house price controls. Taken together, our results highlight the importance of climate uncertainty in driving municipal bond prices.

We find that option expensiveness, measured by delta-hedged option returns, is higher for low-ESG stocks, indicating that investors pay a premium in the options market to hedge against ESG-related uncertainty. We estimate that this ESG premium is about 0.2% for 50 days. All three components of ESG contribute to option pricing. We find that investors pay the ESG premium to hedge against jump risks, but not volatility risks. The effect of ESG performance is more prominent during periods when attention to ESG is higher and for firms that are more subject to ESG-related risks.

Corporate Social Responsibility (CSR) refers to the incorporation of Environmental, Social, and Governance (ESG) considerations into corporate management, financial decision making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities (e.g. pollution) they create, and are willing to be accountable to shareholders as well as a broader group of stakeholders (employees, customers, suppliers, local communities,…). Over the past two decades, various rating agencies developed firm-level measures of ESG performance, which are widely used in the literature. A problem for past and a challenge for future research is that these ratings show inconsistencies, which depend on the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing (SRI). The return implications of investing in the stocks of socially responsible firms, the search for an EGS factor, as well as the performance of SRI funds are the dominant topics. SR funds apply negative screening (exclusion of ‘sin’ industries), positive screening, as well as activism through proxy voting or direct engagement. In this context, one wonders whether responsible investors are willing to trade off financial returns with a ‘moral’ dividend (the return given up in exchange for an increase in utility driven by the knowledge that one invests ethically). A recent literature concentrates on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic de-carbonization as climate change affects financial markets and investor behavior.

We model the welfare consequences of portfolio mandates that restrict investors to hold firms with net-zero carbon emissions. To qualify for these mandates, value-maximizing firms have to accumulate decarbonization capital. Qualification lowers a firm’s required rate of return by its decarbonization investments divided by Tobin’s q, i.e., the dividend yield shareholders forgo to address the global-warming externality. The welfare-maximizing mandate approximates the first-best solution, yielding welfare gains compared to laissez faire by mitigating the weather disaster risks resulting from carbon emissions. Our model generates transitions to steady-state decarbonization-to-productive capital ratios that we use to evaluate the optimality of proposed net-zero targets.

We investigate the expected consequences of negative ESG news on firms’ future profits. After learning about negative ESG news, analysts significantly downgrade their forecasts at short and longer horizons. Negative ESG news affect forecasts more strongly at longer horizons than other types of negative corporate news. The negative revisions of earnings forecasts following negative ESG news mostly reflect expectations of lower future sales (rather than higher future costs). Quantitatively, forecast revisions can explain most of the negative impacts of ESG news on firm value. Analysts are correct to revise forecasts downward following negative ESG news.

More than 50 nations, almost all in the developing world, produce and export coffee, one of the world’s most valuable traded commodities. Some of these countries are dependent on coffee exports for a very significant portion of their international trade and export income. Between 17 and 20 million families are directly involved in coffee production and most are smallholders utilizing just a few hectares of land. During low price periods, evidence of considerable human hardships in many producing regions confirms coffee’s importance as a primary – and sometimes only – source of cash income for many farmers. This study assesses the condition of the world’s coffee production and trade and illuminates the profound structural changes that have occurred in recent years. With ample data and thorough analysis of both production and consumption, it clearly illustrates the new trends in the coffee world. Based on this analysis and considerable public-private experience in coffee trade and economics, the authors offers solutions for reducing the impact of inevitable future price collapses and making coffee a less risky source of income for some of the world’s poorest.

The pricing of carbon transition risk is central to the debate on climate-aware in- vestments. Emissions are tightly linked to sales and are only available to investors with significant lags. The positive carbon return, or brown-minus-green return differential, documented in previous studies arises from forward-looking firm per- formance information contained in emissions rather than a risk premium in ex-ante expected returns. After accounting for the data release lag, carbon returns turn negative in the U.S. and insignificant globally. Developed markets experience lower carbon returns due to intense climate concern shocks, while countries with stringent climate policies exhibit higher carbon returns.

This paper examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.

Mutual funds must publish proxy voting guidelines announcing how they generally vote on their portfolio firms’ ballot items. I collect and analyze the voting policies from these guidelines for 29 major U.S. mutual fund families over 2006-2018. These policies reveal heterogeneous and evolving environmental, social, and governance (ESG) preferences. Exploiting changes in proxy voting guidelines, I find they significantly impact funds’ voting behavior, and portfolio firms adopt their mutual fund shareholders’ preferred governance provisions. This adoption stems from mutual funds’ active voting and other shareholders’ strategic proposal submissions. Proposals aligned with funds’ preferences generate value upon passing.

Evidence of the tremendous rise in the significance of environmental, social, and governance (ESG) investing is coming from all quarters. Fund flows into ESG investment vehicles are growing at a sustained and sometimes exponential pace. Fund complexes are rushing to design products, creating and rebranding scores of mutual funds and exchange traded funds (ETFs), including lower-cost indexed options. Industry leaders, critics, and commentators are all heralding the sea change as a shift in investing – and corporate governance – to more broadly consider environmental and social factors. This Article provides vital context for this conversation. Its descriptive account of the ESG investment landscape drawn from hand-collected 2018-2019 data on a sample of active and passive ESG and traditional funds documents great variation in their investment strategies, portfolios, voting records, and fees. The underlying variation across funds, however, is largely opaque to consumers – who rely on the ESG acronym at their peril. Building on our case study, we examine the supply and demand side drivers fueling ESG market growth, variation, and opacity, and explore mechanisms to better match high-ESG committed investors to high-ESG committed funds, including enhanced transparency and regulation of intermediaries.

We investigate the increasingly common practice of CEOs taking public stances on social and political issues (CEO activism). We find that CEO activism stems from a CEO’s personal ideology and its alignment with investor, employee, and customer ideologies. We show that CEO activism results in positive market reactions. Furthermore, firms with CEO activism realize increased shareholdings from investors with a greater liberal leaning, who rebalance their portfolios towards these firms. Our results suggest that investors’ socio-political preferences are an important channel through which CEO activism affects equity demand and stock prices. Notably, CEOs are less likely to be fired when their activist stances generate positive market responses.

We study ESG-linked pay for global major firms representing 85% of the market capitalization of 59 countries over 2005-2023. ESG-linked pay adoption depends on country environment, industry, and firm characteristics including size and profitability. Adoption of ESG pay is positively associated with ESG performance, while financial outcomes are positive during the era of rising ESG awareness, but mixed during the recent backlash. Instrumented by exposure to the 2022 EU Corporate Sustainability Reporting Directive, ESG-linked pay for US firms causally enhances social performance while reducing Tobin’s Q, suggesting that broader ESG trends significantly influence both adoption and impact of sustainability incentives.

The evidence is compelling: Sustainable Investing can be a clear win for investors and for companies. However, many SRI fund managers, who have tended to use exclusionary screens, have historically struggled to capture this. We believe that ESG analysis should be built into the investment processes of every serious investor, and into the corporate strategy of every company that cares about shareholder value. ESG best-in-class focused funds should be able to capture superior risk-adjusted returns if well executed. This is the key finding of our report in which we looked at more than 100 academic studies of sustainable investing around the world, and then closely examined and categorized 56 research papers, as well as 2 literature reviews and 4 meta studies – we believe this is one of the most comprehensive reviews of the literature ever undertaken. Frequently, Sustainable Investing is stated to yield “mixed results.” However, by breaking down our analysis into different categories (SRI, CSR, and ESG) we have identified exactly where in the sprawling, diverse universe of so-called Sustainable Investment, value has been found. By applying what we believe to be a unique methodology, we show that “Corporate Social Responsibility” (CSR) and most importantly, “Environmental, Social and Governance” (ESG) factors are correlated with superior risk-adjusted returns at a securities level. In conducting this analysis, it became evident that CSR has essentially evolved into ESG. At the same time, we are able to show that studies of fund performance – which have been classified “Socially Responsible Investing” (SRI) in the academic literature and have tended to rely on exclusionary screens – show SRI adds little upside, although it does not underperform either. Exclusion, in many senses, is essentially a values-based or ethical consideration for investors. We were surprised by the clarity of the results we uncovered: 100% of the academic studies agree that companies with high ratings for CSR and ESG factors have a lower cost of capital in terms of debt (loans and bonds) and equity. In effect, the market recognizes that these companies are lower risk than other companies and rewards them accordingly. This finding alone should put the issue of Sustainability squarely into the office of the Chief Financial Officer, if not the board, of every company. 89% of the studies we examined show that companies with high ratings for ESG factors exhibit market-based outperformance, while 85% of the studies show these types of company’s exhibit accounting-based outperformance. Here again, the market is showing correlation between financial performance of companies and what it perceives as advantageous ESG strategies, at least over the medium (3-5 years) to long term (5-10 years). The single most important of these factors, and the most looked at by academics to date, is Governance (G), with 20 studies focusing in on this component of ESG (relative to 10 studies focusing on E and 8 studies on S). In other words, any company that thinks it does not need to bother with improving its systems of corporate governance is, in effect, thumbing its nose at the market and hurting its own performance all at the same time. In the hierarchy of factors that count with investors and the markets in general, Environment is the next most important, followed closely by Social factors. Most importantly, when we turn to fund returns, it is notable that these are all clustered into the SRI category. Here, 88% of studies of actual SRI fund returns show neutral or mixed results. Looking at the compositions of the fund universes included in the academic studies we see a lot of exclusionary screens being used. However, that is not to say that SRI funds have generally underperformed. In other words, we have found that SRI fund managers have struggled to capture outperformance in the broad SRI category but they have, at least, not lost money in the attempt.

In this paper, I study how the political environment impacts the availability of ESG options to individuals. I establish the following judicial channel: because the respect of fiduciary duty is adjudicated by politically-oriented judges, some retirement plans are reluctant to offer ESG options due to litigation risk. I document that there is a significant gap in ESG offerings in retirement plans between conservative and liberal judicial circuits, that is only partially explained by demographic characteristics, firm characteristics, and local political preferences. With a decrease in judicial discretion, which reduces the influence of judges’ political orientations, retirement plans face more uniform treatment between judicial circuits. This closes a substantial share of the gap in the ESG market between jurisdictions, and employees in conservative areas increase their ESG investments more than employees in liberal areas. I find that this effect is mostly driven by green firms, small firms, and firms located in the liberal counties of conservative circuits. Additionally, adding ESG options to the menu leads employees to contribute more overall to their retirement plans.

Using barcode-level retail sales data, we show that firms with higher environmental and social (E&S) ratings experience greater local product sales. This effect increases with advertising intensity, while the adverse reaction to the deterioration in E&S ratings is amplified by negative media coverage. The impact is larger in counties with more Democrats and higher income. Negative E&S news significantly reduces product demand, and the stock market reaction to such news predicts future sales. Environmental disasters amplify nearby consumer sensitivity to firm E&S ratings. These findings provide direct evidence of ESG’s impact on consumer demand, the cash-flow channel of ESG.

We study whether investors perceive responsible investments (i.e., investments in assets with environmental or social benefits) as a luxury good. We exploit windfall wealth due to inheritances from parental deaths to obtain plausibly exogenous variation in wealth. We show that windfall wealth increases likelihood of holding responsible mutual funds and green stocks. Our findings indicate that both supply factors (e.g., bank advice) and demand factors (e.g., preferences) play a role in shaping allocations to responsible investments. Notably, inheritors with a history of charitable donations exhibit a stronger response, emphasizing the influence of a ‘warm glow’ effect on portfolio formation.

Financial economists and commercial providers of governance services have in recent years created measures of the quality of firms’ corporate governance which collapse into a single number (a governance index or rating) the multiple dimensions of a company’s governance. The aim of this paper is twofold, to analyze the performance of corporate governance indices in predicting corporate performance, and to consider the implications for public policy that follow from that assessment. We highlight methodological shortcomings of the extant papers that claim a relation between particular governance measures and corporate performance. Our core conclusion is that there is no consistent relation between governance indices and measures of corporate performance. Namely, there is no one “best” measure of corporate governance: the most effective governance institution appears to depend on context, and on firms’ specific circumstances. It would therefore be difficult for an index, or any one variable, to capture critical nuances for making informed decisions. As a consequence, we conclude that governance indices are highly imperfect instruments for determining how to vote corporate proxies, let alone for portfolio investment decisions, and that investors and policymakers should exercise caution in attempting to draw inferences regarding a firm’s quality or future stock market performance from its ranking on any particular corporate governance measure. Most important, the implication of our analysis is that corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable, because there is considerable variation in the relation between the indices and measures of corporate performance.

A frequently voiced concern is that corporate lobbying activities, at least in part, hinder the implementation of ambitious climate policies. We quantify corporate anti- and pro-climate lobbying expenses of U.S.-listed firms and identify the largest corporate lobbyists and their motives. Firms spend on average $277k per year on anti-climate lobbying ($185k on pro-climate lobbying). Anti-climate lobbyists have more carbon-intensive business models, while pro-climate lobbyists exhibit more green innovation. Firms that spend more on anti-climate lobbying earn higher returns because of a risk channel. Our results align with the increasingly common investor view that anti-climate lobbying constitutes an investment risk.

This paper shows that fossil fuel assets provide valuable opportunities for renewable development, and PE firms are better able to identify and realize these opportunities. Using the intensity of sunlight that falls on fossil fuel plants as an exogenous measure of solar investment opportunity and the passage of the investment tax credit that made solar generation commercially attractive, I find that PE firms are more likely to acquire fossil plants that provide higher solar investment opportunities after solar generation becomes viable. PE acquisition of fossil fuel power plants is followed by an 8% higher likelihood of solar development and a 10% increase in the number of solar plants in the same county. This increase comes from institutional investment in solar energy, specifically from the investors related to the PE owners of fossil plants. These findings contradict the notion that PE firms adversely affect the environment, and suggest that regulations prohibiting PE investment in fossil fuels may unintentionally prevent clean energy financing and impede the green transition.

We document fragile demand for socially responsible investments (SRI) by retail mutual fund investors. Using COVID-19 as an economic shock, we show funds with higher sustainability ratings experienced sharper declines in retail flows during the pandemic, controlling for fund characteristics. The decline in retail SRI fund flows is sharper than that of institutional flows, more pronounced when economies are hit harder by COVID-19, and unlikely to be driven by fund performance, past flows and size, or shifting investor attention. Corroborated by out-of-sample survey evidence, our findings highlight high sensitivity of SRI demand by retail investors with respect to income shocks.

This study investigates the role that financial analysts’ focus on environmental issues can play in redirecting corporate investments toward low-carbon projects. The research leverages the implementation of the EU Taxonomy Regulation for publicly listed companies in France in 2022. We find that the focus of financial analyst on green issues has a positive and significant effect on corporate green investments. We also find that the result is driven by analysts’ focus on opportunities associated with those issues. This study offers new insights into how analyst scrutiny impacts ESG practices and highlights the potential contributions of the EU Taxonomy Regulation.

In this paper, I estimate the effect of mandatory greenhouse gas (GHG) emissions disclosure on corporate value. Using the introduction of mandatory GHG emissions reporting for firms listed on the Main Market of the London Stock Exchange as a source of exogenous variation, I find that firms most heavily affected by the regulation experience significantly positive valuation effects. Increases in value are strongest for large firms and for firms from carbon intensive industries (e.g., oil and gas). Valuation increases are driven by capital market effects such as higher liquidity and lower bid — ask spreads for the most affected firms.

Multi-market banks reallocate capital when local credit demand increases after natural disasters. Using property damage as an instrument for lending growth, we find credit in unaffected but connected markets declines by a little less than 50 cents per dollar of additional lending in shocked areas. However, banks shield their core markets because most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans and they bid up the prices of deposits in the connected markets. These actions help lessen the impact of the demand shock on credit supply.

We investigate the time variability of abnormal returns from socially responsible investing (SRI). Using portfolio regressions and event studies on multiple data sources, including analyst ratings, firm announcements, and realized incidents, we find that highly rated SRI stocks outperform lowly rated SRI stocks during good economic times, for example, periods with high market valuations or aggregate consumption, but underperform during bad times, such as recessions. This variation in abnormal returns of high-SR stocks vis-a-vis low SR stocks is consistent with a wealth-dependent investor preference for SR stocks that leads to an increased (decreased) demand for SRI during good (bad) times.

We investigate how firms react to their product-market peers’ commitment to and adoption of corporate social responsibility (CSR) using a regression discontinuity design approach. Relying on the passage or failure of CSR proposals by a narrow margin of votes during shareholder meetings, we find the passage of a close-call CSR proposal and its implementation are followed by the adoption of similar CSR practices by peer firms. In addition, peers that have greater difficulty in catching up with the voting firm in CSR experience significantly lower stock returns around the passage, consistent with the notion that the spillover effect of the adoption of CSR is a strategic response to competitive threat. Using alternative definitions of peers and examining underlying mechanisms, we further rule out alternative explanations such as that based on propagation by financial intermediaries.

We classify institutions into socially responsible investors (SRI) and not socially responsible investors (NSRI) using the value weighted Corporate Social Responsibility (CSR) scores of their portfolio holdings. We find that firms that exhibit increases in SRI ownership tend to increase future CSR scores. Our analysis of stock price responses to the revelation of SRI ownership changes indicates that the revelation of higher SRI ownership is associated with negative stock returns. These effects are particularly strong when we focus on SRI-activists, who tend to target firms with low CSR scores and lobby to increase them over time. These observations are consistent with the hypothesis that anticipated increases in CSR activities reduce firm values.

Ancient Vedic invocations of India have essentially been global in their value premises. A stakeholder approach to management is elaborated by many great ancient Indian scriptures. The Indian scriptures analyzed essentially point out that organization and its members can relate themselves with the stakeholders either by the Family Relations View or the Transcendental Spiritual View. The Indian scriptures spell out the relationship that should exist between the leader and the stakeholders. The Charity was part of Indian culture and history at all times. The concepts of community food, giving alms to the poor and destitute, making offerings in the temple, serving the underprivileged and feeding orphans on their birthdays, keeping some part of their monthly income aside for donations or in the name of the Almighty, etc. are an indication of rich and socially responsible behavior of every Indian. The four reasons for the adoption of CSR policies and practices attributed by Sundar to the Indian companies were Contributing to society without expecting anything in return, or philanthropy, Internal reasons, such as the desire to improve relations with employees, customers, and shareholders, Better relations with local communities for publicity or tax benefits and Enlightened self-interest. The four phases of business philanthropy in India identified by are, Ethical Model Statist Model Liberal Model Stakeholder Model Oriental thinkers view the entire creation to have emanated from one supreme power, including the instruments of economic production. Nature, which is harnessed by industry, is also a part of that Divine Entity. Hence management now becomes grateful to that Entity for its bounty. An insight into the history of CSR reveals that the idea of philanthropy solely dominated and businesses often restricted themselves to a one-time financial grant till the 1990’s. Commitments to their resources for long term projects were absent. . The concept of CSR has been changing over the last few years with the transition from giving as an obligation or charity to giving as a strategy or responsibility. What is necessary today is the need for a reorientation of corporate organizations’ approach towards stakeholders and stakeholders’ welfare, coupled with an ardent desire to implement the same. Relationships with stakeholders are considered extremely important. Changes in business have stressed upon the application of a wide range of approaches. These are characterized by harnessing the product with increased levels of satisfaction among consumers. Attention to business ethics is rising across the globe, and many companies realize that to succeed, they must earn the respect and confidence of their customers. The economic reforms at the beginning of the 1990’s opened the Indian economy for international competition and privatization. However; the Indian economy is still challenged by widespread poverty widening gaps between different income groups, which creates opportunities for CSR to contribute to development. CSR in India has always been linked with the idea of social welfare and development. India became the first country to make CSR mandatory in 2013. Mandatory CSR is perhaps a solution to reach places that State cannot reach on its own The CSR mandate may give organizations the opportunity to broaden their vision of CSR. The progress on CSR has been slow but is showing signs of improvement as it completes five years. There is a widespread feeling in India, that the high GDP growth rate of the past decade has remained confined to urban areas only and has not reached rural India to lift the poor section of the society. But many view the mandatory proposal as a contradiction and contend that CSR should be voluntary. Full paper available at https://www.researchgate.net/publication/340626287_Indian_CSR_-_An_Overview

Using a dataset that classifies firm-level ESG news as positive and negative, we examine how stock prices react to different types of ESG news. We analyze 111,020 firm–day observations for 3,126 companies and find that prices react only to issues identified as financially material for a given industry by sustainability accounting standards, and the reaction is larger for news that is positive, receive more attention, and that is related to social capital issues. We conclude that investors differentiate in their reactions based on whether the news is likely to affect a company’s fundamentals, and therefore their reactions are motivated by a financial rather than a nonpecuniary motive.

No firm or sector of the global economy is untouched by innovation. In equilibrium, innovators will, flock to (and innovation will occur) where the returns to innovative capital are the highest. In this paper, we document a strong empirical pattern in green patent production. Specifically, we find that oil, gas, and energy-producing firms – firms with lower Environmental, Social, and Governance (ESG) scores, and who are often explicitly excluded from ESG funds’ investment universe – are key innovators in the United States’ green patent landscape. These energy producers produce more, and significantly higher quality, green innovation. In many green technology spaces, they appear to be influential first-movers, not easily substitutable, and to produce ongoing foundational aspects of innovation and commercialization on which other alternative energy producers build. This is broadly true across the green patenting spectrum, and continues through the present day, concentrating specifically in certain green technology branches (for instance, in carbon capture).

We show that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of sea level rise (SLR). This SLR premium is not evident in short-term loans and is not related to borrowers’ short-term realized default or creditworthiness. Further, the SLR premium is smaller when the consequences of climate change are less salient and in areas with more climate change deniers. Overall, our results suggest that mortgage lenders view the risk of SLR as a long term risk, and that attention and beliefs are potential barriers through which SLR risk is priced in residential mortgage markets.

We study the real and financial effects of a unique law in the United Kingdom that mandates publicly listed firms to disclose their greenhouse gas emissions (GHG) in a standardized way in their annual reports. Firms respond to the law by reducing GHG emissions by about 16 percent. Firms reduce emissions through costly operational adjustments. Examining why firms reduce emissions, we present evidence consistent with the views that the regulation increased the future costs of high emissions and facilitated across firm comparisons. We conclude that financial motivations push firms to reduce GHG emissions when mandatory emissions disclosure requirements are introduced.

We study the economic and financial impact of firm-level negative environmental and social (E&S) incidents. Using SafeGraph’s daily store-level foot-traffic data, we find a significant yet modest decline in store visits following such incidents. This decline is driven primarily by more E&S-conscious consumers, whose visits drop nearly four times more than those of less E&S-conscious ones. Our results are more pronounced when (1) the negative incident is more severe and widespread; (2) the affected population is younger and more educated; (3) firms have larger pre-incident advertising expenditures and higher pre-incident E&S ratings; and (4) local product markets are more competitive. Lastly, we find that following a negative E&S incident, the average firm loses about $19.2 million in sales in more E&S-conscious areas and $9.6 million in less E&S-conscious areas. Firms respond by temporarily reducing press releases, adjusting advertising strategies, and closing stores. Our findings suggest that firms’ E&S practices directly affect firm value through consumer behavior and cash flows, and that firms recognize this impact by adopting mitigation strategies.

Studying 30 countries, we find that the link between employee satisfaction and stock returns is significantly increasing in a country’s labor market flexibility. This result is consistent with employee satisfaction having greater recruitment, retention, and motivation benefits where firms face fewer hiring and firing constraints and employees have greater ability to respond to satisfaction. Labor market flexibility also increases the link between employee satisfaction and current valuation ratios, future profitability, and future earnings surprises, inconsistent with omitted risk factors and identifying channels through which employee satisfaction may affect stock returns. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

The disclosure of corporate environmental performance is an increasingly important element of a firm’s ethical behavior. We analyze how the legal origin of foreign institutional investors affects a firm’s voluntary carbon disclosure. Using a large sample of firms from 36 countries, we show that foreign institutional ownership from civil law countries improves the scope and quality of a firm’s greenhouse gas emissions reporting. This relation is robust to addressing endogeneity and selection biases. The effect is more pronounced in firms from non-climate-sensitized countries, for which the gap between firms’ environmental standards and investors’ environmental targets is potentially larg-er, and in less international firms. Firms with a higher level of voluntary carbon disclosure also exhibit higher valuations.

Under the Clean Development Mechanism, developing countries will be able to produce certified emissions reductions (CERs, sometimes called offsets) through projects that reduce greenhouse gas emissions below business-as-usual levels. The challenges of setting up offset markets are considerable. Do forestry projects, as a class, have more difficulty than energy projects reducing greenhouse gas emissions in ways that are real, measurable, additional, and consistent with sustainable development? Under the Kyoto Protocol, industrial countries accept caps on their emissions of greenhouse gases. They are permitted to acquire offsetting emissions reductions from developing countries – which do not have emissions limitations – to assist in complying with these caps. Because these emissions reductions are defined against a hypothetical baseline, practical issues arise in ensuring that the reductions are genuine. Forestry-related emissions reduction projects are often thought to present greater difficulties in measurement and implementation than energy-related emissions reduction projects. Chomitz discusses how project characteristics affect the process for determining compliance with each of the criteria for qualifying. Those criteria are: – Additionality. Would the emissions reductions not have taken place without the project? – Baseline and systems boundaries (leakage). What would business-as-usual emissions have been without the project? And in this comparison, how broad should spatial and temporal system boundaries be? – Measurement (or sequestration). How accurately can we measure actual with-project emissions levels? – Duration or permanence. Will the project have an enduring mitigating effect? – Local impact. Will the project benefit its neighbors? For all the criteria except permanence, it is difficult to find generic distinctions between land use change and forestry and energy projects, since both categories comprise diverse project types. The important distinctions among projects have to do with such things as: – The level and distribution of the project’s direct financial benefits. – How much the project is integrated with the larger system. – The project components’ internal homogeneity and geographic dispersion. – The local replicability of project technologies. Permanence is an issue specific to land use change and forestry projects. Chomitz describes various approaches to ensure permanence or adjust credits for duration: the ton-year approach (focusing on the benefits from deferring climatic damage, and rewarding longer deferral); the combination approach (bundling current land use change and forestry emissions reductions with future reductions in the buyer’s allowed amount); a technology-acceleration approach; and an insurance approach. This paper – a product of Infrastructure and Environment, Development Research Group – is part of a larger effort in the group to assess policies for mitigating climate change. The author may be contacted at kchomitz@worldbank.org.

Competitive challenges and regulatory uncertainty associated with the green transition should incentivize firms to innovate and to sway regulatory policy. We develop a novel method to identify “green” and “brown” environmental lobbying. We find that firms’ lobbying is unrelated to innovation: green innovators are equally likely to lobby green or brown. Firms’ environmental lobbying is explained by current business operations and predicts real actions, for example future emissions. In contrast, green innovation is better characterized as a real option, to be exercised only if necessary. Despite the informativeness of lobbying, neither environmental ratings nor UNPRI signatories’ investments incorporate this signal.

We study credit providers and costs of debt for firms with low ESG performance. First, we find that, while both banks and bondholders charge low-ESG borrowers a higher interest rate compared to high-ESG borrowers, the premium charged by banks is relatively lower. Second, while bondholders reduce the amount of financing when borrowers’ ESG performance deteriorates, banks keep the size of their loans unchanged or even increase loans issued to low-ESG borrowers. We provide evidence that the difference in creditors’ policies is driven by banks’ superior information about how material borrowers’ low ESG performance is and by lenders’ different preferences regarding their borrowers’ ESG performance.

We study the effects of government-subsidized childcare on women’s careers and firm outcomes using linked tax filing data. Exploiting cohort-level variation in childcare access based on a Quebec universal childcare reform, we show that earlier access to childcare not only increases new mothers’ employment and earnings, but also prompts them to reallocate careers to firms previously unattractive to new mothers. These firms subsequently benefited from the reform, drawing more young, productive female workers and experiencing better performance. Our results suggest that childcare frictions hamper women’s career progression and the allocation of human capital in the labor market.

This paper investigates the impact of female analyst coverage on firms’ environmental and social (E&S) performance. Exploiting broker closures as a quasi-exogenous shock to analyst coverage, we show that firms with an exogenous drop in female analyst coverage subsequently experience a significant drop in E&S scores compared to those with an exogenous drop in male analyst coverage. To uncover the mechanisms, we develop novel machine learning models to analyze over 2.4 million analyst reports and 120,000 earnings call transcripts. Our analysis reveals that compared to their male counterparts, female analysts are more likely to discuss E&S issues, especially involving regulatory compliance, stakeholders, and the environment, in their research reports and during earnings conference calls, and that they exhibit distinct cognitive and linguistic patterns when discussing E&S issues. Moreover, female analysts are more likely to issue lower stock recommendations and target prices, following negative E&S discussions in their reports than their male counterparts. Finally, investors react significantly more to female analysts’ negative tones in discussing E&S issues. We conclude that gender diversity among analysts is a key driver of corporate E&S practices, and our findings shed light on the source of gender differences in skills in the equity analyst profession.

This paper investigates how carbon emissions from cryptocurrency mining influence the pricing of cryptocurrencies. Using a general equilibrium framework, I examine the dual implications of carbon emissions in the context of cryptocurrency mining: while higher carbon emissions signal stronger network security, they also lead to adverse environmental impacts. The equilibrium CAPM-like pricing relation highlights four key insights: First, ceteris paribus, cryptocurrencies exhibit a lower carbon premium compared to equities. Second, under stringent environmental policies, systematic risk (i.e., beta exposure) rises with carbon intensity in cryptocurrencies—an effect that can be mitigated through the adoption of green energy in the mining process. Third, speculative behavior weakens carbon sensitivity, thereby lowering carbon premium in cryptocurrencies. Fourth, regulatory interventions targeting cryptocurrencies’ carbon footprints may trigger negative market reactions, as lower energy usage can be perceived as undermining network security, potentially outweighing the perceived environmental benefits.

This paper studies how imposing personal liability on directors and executives can mitigate corporate environmental externalities. I use a landmark court case that increased perceptions of out-of-pocket liability risk related to corporate releases of toxic chemicals. This change varied across Canadian provinces based on their legal systems, which I exploit in a difference-indifferences analysis. I find that imposing personal liability leads to a 23% reduction in toxic chemical releases. Treated small firms scale down operations while large firms invest in clean technology. This environmental benefit is accompanied by a 2.6% decrease in abnormal returns following the shock, as well as an increase in director turnover, particularly among the wealthiest directors and environmental experts who are the most exposed to liability risk. These findings contribute to the debate on the optimal level of personal liability to regulate corporate externalities.

We study the impact of partisan media on CSR ratings using the staggered expansion of Sinclair Broadcast Group, the largest conservative regional TV network. After Sinclair entry, CSR ratings of local firms decline across all dimensions: environmental, social, and governance. The effect operates through two mutually non-exclusive channels: shifts in ideology and reduction in local coverage. We provide evidence consistent with the first channel based on public opinion surveys, election results, and firms’ political contributions. Consistent with the second channel, the effect is stronger for firms with higher customer awareness, low institutional ownership, in sin industries, and in Sinclair-dominated markets.

The year 2015 seems to have been an historic turning point in combatting climate change. Not only did the world agree on the first universal climate agreement, but the United Nations established the Agenda 2030 for Sustainable Development. Implementing the Paris commitment means limiting global warming to below 2°, striving even for 1.5°. In practice, this implies the radical decarbonisation of our economies, which entails fundamental changes in the financial world towards what has been termed “green finance”. Green finance represents a positive shift in the global economy’s transition to sustainability through the financing of public and private green investments and public policies that support green initiatives. Two main tasks of green finance are to internalise environmental externalities and to reduce risk perceptions in order to encourage investments that provide environmental benefits. The major actors driving the development of green finance include banks, institutional investors and international financial institutions as well as central banks and financial regulators. Some of these actors implement policy and regulatory measures for different asset classes to support the greening of the financial system, such as priority-lending requirements, below-market-rate finance via interest-rate subsidies or preferential central bank refinancing opportunities. Although estimations of the actual financing needs for green investments vary significantly between different sources, public budgets will fall far short of the required funding. For this reason, a large amount of private capital is needed. However, mobilising capital for green investments has been limited due to several microeconomic challenges such as problems in internalising environmental externalities, information asymmetry, inadequate analytical capacity and lack of clarity in the definition of “green”. There are maturity mismatches between long-term green investments and the relatively short-term time horizons of savers and – even more important – investors. In addition, financial and environmental policy approaches have often not been coordinated. Moreover, many governments do not clearly signal how and to what extent they promote the green transition. In order to increase the flow of private capital for green investment, the following measures are crucial. First, it is necessary to design an enabling environment facilitating green finance, including the business climate, rule of law and investment regime. Second, the definition of green finance needs to be more transparent. Third, standards and rules for disclosure would promote developing green finance assets. For all asset classes – bank credits, bonds and secured assets – voluntary principles and guidelines for green finance need to be implemented and monitored. Fourth, because voluntary guidelines may not be sufficient, they need to be complemented by financial and regulatory incentives. Fifth, financial and environmental policies as well as regulatory policies should be better coordinated, as has happened in China.

We show that firms increase their pollution intensity as they become more financially distressed. This is particularly the case in high-environmental liability risk locations, akin to a risk-taking motive. We then rationalize these facts by calibrating a dynamic model featuring endogenous default, and dirty vs. clean investment. Dirty assets reduce short-term costs but expose firms to persistent liability and regulatory risks. Thus, as firms become more financially distressed, they gradually take on more risk and shift the composition of their assets toward the more polluting ones. Our counterfactuals highlight the limited environmental impact of blanket divestments when heightened financing costs lead firms to increase their pollution intensity while scaling down. Tilting strategies, however, are more effective at tapering pollution.

I propose a model to examine how investors with ESG preferences jointly influence firms’ real green investments and greenwashing. Paradoxically, stronger investor ESG preferences may reduce real green investments due to increased greenwashing, which undermines the reliability of ESG information. When this information distortion is severe, firms are disincentivized to make real green investments, as the market-perceived ESG gains are obscured by misinformation, while the financial costs of green investments are still reflected in stock prices. This paradox is most likely to occur when the cost of manipulating ESG information is low, the correlation between ESG and financial fundamentals is weak, and financial information quality is high. Additionally, brown firms with poorer financial performance tend to greenwash more. These findings raise concerns that ESG investing could backfire without effective disclosure regulations. I analyze two practical measures to enhance real impact: diversifying green technology options and linking executive pay to ESG outcomes.

This paper examines the role of supply-chain relationships for the transmission of corporate Environmental and Social (E&S) policies, and the resulting impact on real E&S outcomes and firm performance. I show that E&S policies propagate from customers to suppliers, especially when customers have higher bargaining power and suppliers are in countries with lower ESG standards. This transmission mechanism matters: suppliers subsequently reduce their toxic emissions, litigation and reputation risk decreases, and financial performance improves. I use staggered E&S regulation changes around the world to establish causality. Global supply-chains act as a transmission mechanism for regulatory requirements and standards across borders.

This paper conducts a textual analysis of earnings call transcripts to quantify climate risk exposure at the firm level. We construct dictionaries that measure physical and transition climate risks separately and identify firms that proactively respond to climate risks. Our validation analysis shows that our measures capture firm-level variations in respective climate risk exposure. Firms facing high transition risk, especially those that do not proactively respond, have been valued at a discount in recent years as aggregate investor attention to climate-related issues has been increasing. We document differences in how firms respond through investment, green innovation, and employment when facing high climate risk exposure.

We analyze employee-provided salary and employer reviews to document a series of stylized facts about the relation between job satisfaction and measures of base pay and total pay inequality among rank-andfile employees. We find that only base-pay inequality is negatively associated with job satisfaction, which suggests that employees perceive only differences in base pay as inequitable. This relation is stronger at firms with greater job similarity where salary comparisons are more warranted, and when employees live near headquarters or in areas concerned with inequality. Employees with top quartile pay exhibit more inequity aversion than those with intermediate pay but less than those with bottom pay. Finally, base-pay inequality is negatively associated with firm performance and value. Our findings align well with the inequity aversion hypothesis, investigated primarily in experimental or specialized settings, and pose a challenge to alternative explanations.

Corporate Social Responsibility (CSR) refers to the incorporation of Environmental, Social, and Governance (ESG) considerations into corporate management, financial decision making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities (e.g. pollution) they create, and are willing to be accountable to shareholders as well as a broader group of stakeholders (employees, customers, suppliers, local communities,…). Over the past two decades, various rating agencies developed firm-level measures of ESG performance, which are widely used in the literature. A problem for past and a challenge for future research is that these ratings show inconsistencies, which depend on the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing (SRI). The return implications of investing in the stocks of socially responsible firms, the search for an EGS factor, as well as the performance of SRI funds are the dominant topics. SR funds apply negative screening (exclusion of ‘sin’ industries), positive screening, as well as activism through proxy voting or direct engagement. In this context, one wonders whether responsible investors are willing to trade off financial returns with a ‘moral’ dividend (the return given up in exchange for an increase in utility driven by the knowledge that one invests ethically). A recent literature concentrates on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic de-carbonization as climate change affects financial markets and investor behavior.

We show that U.S. firms increase their sustainability performance when their directors acquire expertise through their exposure to sustainability reforms in foreign countries where they serve as directors. Our results suggest that a board that gains sustainability expertise increases a firm’s overall sustainability performance by 7.1%. The increase in sustainability comes both from improvements in environmental and social practices. Directors also consider the tradeoffs between sustainability improvements and firm characteristics, with boards having a stronger impact on sustainability in firms from clean industries and firms that face fewer operational and financial constraints.

This paper shows that private equity (PE) ownership, in private-to-private buyouts, leads to a reduction in pollution when the target company faces high potential liabilities for polluting. Conversely, PE-backed firms increase pollution when environmental liability risks are low, as shown by a novel natural experiment that reduced these risks for projects located on federal land. Exploiting specific PE deals within the energy industry, I find that PE governance is the main driver of the results. The results suggest that increasing litigation and regulation-related risks can mitigate the potentially detrimental effects of PE ownership on stakeholders.

This study investigates how household wealth affects the human capital of startups, based on U.S. Census individual-level employment data, deed records, and geographic information system (GIS) data. Using floods as a wealth shock, a regression discontinuity analysis shows inundated residents are 7% less likely to work in startups relative to their neighbors outside the flood boundary, within a 0.1-mile-wide band. The effect is more pronounced for homeowners, consistent with the wealth effect. The career distortion leads to a significant long-run income loss, highlighting the importance of self-insurance for human capital allocation.

Many households face uninsurable background risks due to future sea level rise (SLR). Using detailed local variation in SLR exposure and disaggregated geographic information on households in the United States, I show that SLR exposed households participate less in the stock market compared to their unexposed counterparts within the same neighborhood. This effect is driven by long-run SLR risks as opposed to short-run flood risks and is elevated at times when attention to climate change is high. I provide causal evidence of the effect of SLR risks on household portfolio choices by exploiting plausibly exogenous variation stemming from the adoption of state-led climate change adaptation plans that reduced households’ SLR risks. Additional tests isolate the effect of SLR exposure as a background risk from alternative explanations, including changes in house prices, past flooding experiences, endogenous location choices, political beliefs, or differences in risk preferences.

This paper identifies a labor channel of climate risk exposure through firms’ reliance on workers exposed to high temperatures while performing job duties. I find that unexpected extreme heat reduces firm-level and plant-level labor productivity, making labor less efficient than capital as a production input. Firms adapt by shifting toward more capital-intensive production functions, with increased capital expenditures and R&D expenses, acquisition of robotics-related human capital, and development of automation-related technology. The results are stronger among firms facing higher long-run heat risks and fewer financial constraints. Further analysis indicates that these automation initiatives mitigate heat risks and enhance firm value.

This paper investigates the effect of financial constraints on pollution abatement methods. Using unique plant-level data from the French manufacturing sector between 2011 and 2018, I provide strong evidence that capital constraints discourage pollution prevention and have no impact on pollution treatment without environmental laws. First, financially constrained firms are less likely to invest in pollution prevention but not in pollution treatment. Second, by applying a staggered difference-in-differences methodology, I find that a negative shock to firms’ cash flows reduces the amount spent on pollution prevention. Finally, my results show that financially constrained firms increase their investments in pollution treatment relative to unconstrained firms after the implementation of an environmental regulation. Overall, my findings suggest that financial constraints lead to reduced pollution prevention and encourage treatment when environmental laws are enforced.

What motivates ESG integration? I find both non-pecuniary and risk-mitigating preferences explain its prominence. A novel test based on changes in mutual funds’ portfolio holdings and several empirical findings establish the two widely endorsed ESG ratings proxy these preferences. With this, I show each preference induces sizable equity premium identified through option-implied expected returns. Due to unexpectedly persistent demand growth for ESG-conscious assets, realized returns mask true ESG pricing effects, especially those attributable to non-pecuniary preference. Consequently, this paper lends support to recent theoretical frameworks with non-pecuniary preference and explains why empirical literature has lacked consensus.

We find that banks differ in their propensity to lend to minorities based on their stakeholders’ aversion to inequality. Using mortgage application data collected under the Home Mortgage Disclosure Act, we document a large and persistent cross-sectional variation in banks’ propensity to lend to minorities. Inequality-averse banks have a higher propensity to lend to borrowers in high-minority areas and, within census tracts, to non-white borrowers compared to other banks. This higher propensity (i) is not explained by selection of applicants, (ii) allows these banks to retain and attract their inequality-averse stakeholders, and (iii) does not predict worse ex-post loan performance.

We exploit a quasi-natural experiment, the change in Sustainalytics’ ESG rating methodology, which reassesses risk and inverts the rating scale, to examine how reliance on ESG ratings impacts stock returns. The change in the ESG rating influences stocks’ returns but this is mainly due to retail investors’ misinterpretation about the change in the ratings scale. Sophisticated investors, such as 13F institutions and short sellers, take advantage of individual investors’ blind trust in ratings by taking the opposite side of their trades. We find no effect on mutual funds’ portfolio rebalancing or investor flows. Firms react to the change in their ESG rating and subsequent abnormal returns by issuing or repurchasing shares.

This study evaluates whether employees have window-dressing-free information about firms’ ESG (Environmental, Social, Governance) practices. Analyzing 10 million employee reviews, it reveals that 43% of reviews discuss ESG topics, with governance surprisingly receiving the most attention. Assembling novel hard-to-manipulate ESG indicators, including emissions estimates from satellite imagery, the study finds employees’ ESG inside view is more informative about these indicators than existing ESG ratings. Moreover, the inside view appears robust to ESG cheap talk, as low-cost changes in firms’ ESG commitments do not affect it, while costlier changes do. Thus, employee perspectives can help investors assess firms’ authentic ESG performance.

We study the economic motivations driving sustainability-linked loans (SLLs), a quickly growing loan segment, where the contract terms depend on the borrower’s ESG performance. Our analysis finds that SLLs do not offer advantageous loan terms nor result in improved borrowers’ ESG performance. However, we observe that SLL lenders attract higher deposits after issuance, supporting lending growth. Further, we find no evidence that lenders offer SLL contracts predominantly to low-risk borrowers. With the lenders reaping the majority of benefits from such arrangements, these findings call into question the purported objectives of SLLs in promoting sustainable practices.

China, officially the People’s Republic of China, includes Mainland China and two special administrative regions, Hong Kong and Macao. The political, legal and economic systems of Mainland China are different from those of the special administrative regions. The development stage of responsible investment (RI) in Hong Kong is more advanced than that in Mainland China, while RI in Macau is still under-developed and has rarely been discussed. Therefore, this chapter uses data from Mainland China to avoid ambiguity and maintain clarity. RI in China differs from the conventional definition that incorporates financial objectives with additional considerations of environmental, social and corporate governance (ESG) criteria into the investment process. In the Chinese context, RI signifies the adoption of four selection criteria – economic indicators, ethics, sustainability and legal issues; hence these criteria represent preferences towards government policy, tax and legal requirements in portfolio selection. RI mutual funds in China can be ESG inclusive, fully integrating ESG criteria into investment, or ESG themed, such as environmentally-friendly funds, low-carbon funds and sustainable investment funds. Besides RI mutual funds, institutional and individual investors can also invest in ESG-themed pension funds, life and property insurance, renewable energies, green projects, etc. Compared with RI mutual funds, RI applied to other asset classes, such as venture capital, hedge fund and private equity, are relatively insignificant. This chapter seeks to provide an overview of RI in China. It begins with a statistical overview of China’s social and economic background in order to provide some thoughts on the driving forces of RI. It is followed by reporting the historical progress and state of the RI market in China and showing the rapid growth of the RI mutual funds industry. It then discusses the practices of RI institutions, aiming to provide a deeper understanding of support and engagement activities in China. It further briefly discusses the most urgent ESG risks, the most risk-exposed industries and the most controversial companies in China. In the end, it provides suggestions to promote the development of RI from both policy and investment perspectives.

The literature on new forms of governance suggests important trade-offs regarding the role of government in relation to corporate social responsibility (CSR) activities. Theories associate state regulation with clear minimum standards and high compliance, but also suggest advantages of self-regulatory approaches that allow greater flexibility and support best-practices. Given these potential trade-offs, France, Denmark, and the UK were pioneers of a hybrid approach: mandatory non-financial disclosure (NFD). This article shows that despite the different motivations for mandatory NFD in these countries, the disclosure requirements are “soft” and flexible – acknowledging demands from business “that one size regulation doesn’t fit all.” The article further examines the effects of these regulations on CSR activities in 24 OECD countries using the Asset4 ESG database. Our analysis shows that firms in countries with mandatory non-financial disclosure adopt significantly more CSR activities. However, our analysis also highlights that mandatory disclosure decreases the variance between firm activities, contrary to arguments about flexibility. Furthermore, it does not lead to a decline in corporate irresponsibility. These results have implications for our understanding of regulatory trade-offs and how to promote more effective forms of CSR.

Exploiting the “twin” structure of German government green and conventional securities, we use a dynamic term structure model to estimate the greenium stemming only from investors’ green values. This greenium is distinct from the yield spread between the twin securities (the green spread), which can reflect pecuniary motives, as the model purifies it from confounding and idiosyncratic factors unrelated to environmental concerns. While the green spread correlates with stock market prices, relative special collateral value, and temporary supply/demand imbalances, our greenium correlates only with proxies of environmental concerns. We also estimate the greenium’s term structure and expected green returns.

Using rich hand-collected data, we examine how corporations use carbon offset credits issued by third-party developers to claim emission reductions. Larger firms with higher institutional ownership and net-zero commitments tend to use offsets. However, offsets are used intensively in low-emission industries. After an exogenous ESG rating downgrade, triggered by a leading ESG rating agency’s methodology change, low-emission firms retire larger quantities of cheap, low-quality offsets while heavy emitters decarbonize more in-house. Our findings are consistent with a separating equilibrium where firms choose whether to outsource their transition efforts, but also with firms using offsets strategically for certification and ranking benefits.

This paper examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives. We argue that two types of risks are particularly relevant for central banks. First, a weather-related natural disaster could trigger financial and macroeconomic instability if it severely damages the balance sheets of households, corporates, banks, and insurers (physical risks). Second, a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (transition risks). Climate-related disclosure could facilitate an orderly transition to a low-carbon economy if it helps a wide range of investors better assess their financial risk exposures.

ESG is one of the most notable trends in corporate governance, management, and investment of the past two decades. It is at the center of the largest and most contentious debates in contemporary corporate and securities law. Yet few observers know where the term comes from, who coined it, and what it was originally aimed to mean and achieve. As trillions of dollars have flowed into ESG-labeled investment products, and companies and regulators have grappled with ESG policies, a variety of usages of the term have developed that range from seemingly neutral concepts of integrating “environmental, social, and governance” issues into investment analysis to value-laden notions of corporate social responsibility or preferences for what some have characterized as “conscious” or “woke” capitalism. This Article makes three contributions. First, it provides a history of the term ESG that was coined without precise definition in a collaboration between the United Nations and major players in the financial industry to pursue wide-ranging goals. Second, it identifies and examines the main usages of the term ESG that have developed since its origins. Third, it offers an analytical critique of the term ESG and its consequences. It argues that the combination of E, S, and G into one term has provided a highly flexible moniker that can vary widely by context, evolve over time, and collectively appeal to a broad range of investors and stakeholders. These features both help to account for its success, but also its challenges such as the difficulty of empirically showing a causal relationship between ESG and financial performance, a proliferation of ratings that can seem at odds with understood purposes of the term ESG or enable “sustainability arbitrage,” and tradeoffs between issues such as carbon emissions and labor interests that cannot be reconciled on their own terms. These challenges give fodder to critics who assert that ESG engenders confusion, unrealistic expectations, and greenwashing that could inhibit corporate accountability or crowd out other solutions to pressing environmental and social issues. These critiques are not necessarily fatal, but are intertwined with the characteristic flexibility and unfixed definition of ESG that was present from the beginning, and ultimately shed light on obstacles for the future of the ESG movement and regulatory reform.

We use detailed, individual-level, panel data to relate growing political polarization to (i) changing beliefs about the pace of global warming and (ii) the propensity to make climate-friendly investment decisions. Individuals in our study were exogenously exposed to forest fires to varying degrees in the summer of 2018. While exposure increased the perceived pace of climate change on average, the response is attenuated in areas experiencing increases in right-wing populism, especially when local environmental media coverage was stronger. Changing beliefs also predict climate-friendly investment, but this is heavily mediated by the same political dynamics.

How special interests shape legislative decisions is a fundamental question in political economy. In this paper, we examine the influence of carbon-emitting corporations on legislative voting behavior on climate issues and the impact of the votes on firm value. Using a comprehensive sample of votes on contested climate legislation in the US House of Representatives and Senate, we find that politicians with high carbon dependency—those receiving more campaign contributions from carbon-emitting firms—are more likely to cast climate-skeptic votes. This relation is stronger when politicians face greater electoral pressure. Using the redistribution of campaign contributions following the narrow defeat of incumbent representatives to generate plausibly exogenous shocks to their elected peers’ carbon dependency, we find that the relation is likely causal. We further find evidence that carbon-emitting firms benefit from their connected politicians casting climate-skeptic votes.

The greenium—the expected return differential between green and brown securities—is central for ESG investors. Replicating the literature’s equity greenium estimates based on realized returns with 23 greenness measures, we find all estimates to be insignificant when accounting for multiple testing. Guided by a new theory, we propose an aggregate green score. This score combined with forward-looking expected returns yields a more precisely estimated annual equity greenium of -30 basis points per standard deviation increase in greenness. Consistent with theory, the greenium is more negative in greener countries and over time. Finally, we estimate greeniums for corporate bonds, weighted-average costs of capital, and sovereign bonds.

Financial economists and commercial providers of governance services have in recent years created measures of the quality of firms’ corporate governance which collapse into a single number (a governance index or rating) the multiple dimensions of a company’s governance. The aim of this paper is twofold, to analyze the performance of corporate governance indices in predicting corporate performance, and to consider the implications for public policy that follow from that assessment. We highlight methodological shortcomings of the extant papers that claim a relation between particular governance measures and corporate performance. Our core conclusion is that there is no consistent relation between governance indices and measures of corporate performance. Namely, there is no one “best” measure of corporate governance: the most effective governance institution appears to depend on context, and on firms’ specific circumstances. It would therefore be difficult for an index, or any one variable, to capture critical nuances for making informed decisions. As a consequence, we conclude that governance indices are highly imperfect instruments for determining how to vote corporate proxies, let alone for portfolio investment decisions, and that investors and policymakers should exercise caution in attempting to draw inferences regarding a firm’s quality or future stock market performance from its ranking on any particular corporate governance measure. Most important, the implication of our analysis is that corporate governance is an area where a regulatory regime of ample flexible variation across firms that eschews governance mandates is particularly desirable, because there is considerable variation in the relation between the indices and measures of corporate performance.

This paper develops and tests an equilibrium model for analyzing active fund management with ESG considerations. Sustainable investing incentivizes mutual fund managers to intensify information acquisition, expanding the scope of the active fund industry. Sustainability-guided information and trading decisions result in increasing portfolio deviation from benchmarks at the fund level, while they contribute to enhancing price informativeness and diminishing discount rates at the stock level. Collectively, the negative ESG-expected return relation amplifies for green assets but weakens for brown assets, as supported by evidence from the implied cost of equity capital.

Below we examine market outliers in financial markets. How much effect do these outliers have on long term performance? Can the investor prepare for these anomalies, or are they truly ‘black swans’ that cannot be managed? In this issue we examine numerous global financial markets on daily and monthly time frames. We find that these rare outliers have a massive impact on returns. However, these outliers tend to cluster and the majority of both good and bad outliers occur once markets have already been declining. We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, demonstrating that a significant majority of the 10 best days and the 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies, and conclude that market timing and risk management is indeed possible, and beneficial to the investor.

The catalysts of stock price crashes are well documented, but much less is known about what happens following crashes. We consider how managers respond to stock price crashes. Management becomes more focused on improving transparency, raising investment efficiency, reducing agency conflicts, and regaining the trust of stakeholders by investing in social capital and employee welfare. These actions result in the increase in firm value. We also find evidence that management undertake these actions out of concern for their own tenure of employment.

This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, we find that institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Our evidence shows that institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S. In cross-section, investors increase firms’ E&S performance when they come from countries where there is a strong community belief in the importance of E&S issues, but not otherwise. Overall, these results indicate that investors drive firms’ E&S performance around the world and transplant their local social norms in that process.

This paper presents an industry equilibrium model where firms have a choice to engage in corporate social responsibility (CSR) activities. We model CSR as an investment to increase product differentiation that allows firms to benefit from higher profit margins. The model predicts that CSR decreases systematic risk and increases firm value and that these effects are stronger for firms with high product differentiation. We find supporting evidence for our predictions. We address a potential endogeneity problem by instrumenting CSR using data on the political affiliation of the firm’s home state.

Research on capital structure and product market interactions shows that high leverage is associated with substantial losses in market share due to unfavorable actions by customers and competitors. We examine whether corporate social responsibility (CSR) affects firms’ interactions with customers and competitors, and whether it can reduce the costs of high leverage. We find that CSR reduces losses in market share when firms are highly leveraged. By reducing adverse behavior by customers and competitors, CSR helps highly leveraged firms keep customers and guard against rivals’ predation. Our results support the stakeholder value maximization view of CSR.

We examine the valuation impact of employee-friendly (EF) culture. Using a sample of 3,457 firms from 43 countries for the period 2003 to 2014, we show that firms with a more EF culture have higher valuations (Tobin’s q). The impact on valuation stems from improved technical efficiency and higher profitability. Consistent with the good governance view, we find that the positive valuation impact of an EF culture is larger for firms in countries with better investor protection, for firms with better governance and fewer agency problems, and for those in high-tech and in labor-intensive industries.

Does financial reform improve public good provision? We examine state-level adoption of municipal bankruptcy law. After reform, municipalities’ borrowing costs decrease and bonds’ issuance increase, particularly for bonds financing hospitals; hospitals’ investments increase, particularly when using such bonds; local firms’ investment and performance increase, particularly in the construction sector. Ex-ante, reform occurs earlier in states with weaker unions, stronger bondholders’ interests, and better courts. Similar factors explain congressional voting on municipal bankruptcy law. These results support the hypothesis that financial reform destroys labor union rents and expands investment, highlighting a novel spillover channel from public finance to the real economy.

Climate scientists project a rise in both average temperatures and the frequency of temperature extremes. We study how extreme temperatures affect companies’ earnings across different industries and whether sell-side analysts understand these relationships. We combine granular daily data on temperatures across the continental U.S. with locations of public companies’ establishments and build a panel of quarterly firm-level temperature exposures. Extreme temperatures significantly impact earnings in over 40% of industries, with bi-directional effects that harm some industries while others benefit. Analysts and investors do not immediately react to observable intra-quarter temperature shocks, but earnings forecasts account for temperature effects by quarter-end in many, though not all, industries.

We study the conditions under which debt securities that make the cost of debt contingent on the issuer’s carbon emissions, similar to sustainability-linked loans and bonds, can be equivalent to a carbon tax. We propose a model in which standard and environmentally-oriented agents can adopt polluting and non-polluting technologies, with the latter being less profitable than the former. A carbon tax can correct the laissez-faire economy in which the polluting technology is adopted by standard agents, but requires sufficient political support. Carbon-contingent securities provide an alternative price incentive for standard agents to adopt the non-polluting technology, but require sufficient funds to fully substitute the regulatory tool. Absent political support for the tax, carbon-contingent securities can only improve welfare, but the same is not true when some support for a carbon tax exists. Understanding the conditions under which the regulatory and capital market tool are substitutes or complements within one economy is an important stepping stone in thinking about carbon pricing globally. It sheds light, for instance, on how developed economies can deploy finance to curb carbon emissions in developing economies where support for a carbon tax does not exist.

We investigate the impact of three non-climate environmental criteria: biodiversity, water, and pollution prevention, on infrastructure firms’ credit risk term structure from the perspective of double materiality. Our findings show that firms that effectively manage these three environmental risks to which they are materially exposed have up to 93bps better long-term refinancing conditions compared to the worst-performing firms. While the results are less significant for the firm’s material impact on the environment, investors still reward the management of these criteria beyond climate with improved long-term financing conditions for infrastructure investments. Overall, we find that financial markets respond positively to the prospect of more stringent regulations related to these criteria, which are currently used by the EU Taxonomy to assess the sustainability of investments.

Aligning investments to the climate and sustainability targets requires the introduction of stable climate-aligned policies. In this regard, a global Carbon Tax (CT) and a revision of the microprudential banking framework via a Green Supporting Factor (GSF) have been advocated. However, our understanding of the conditions under which a GSF or a CT could contribute to scale up new green investments, or introduce new sources of risk for financial stability, is poor. In addition, the banking sector’s reaction to the policy announcements i.e. the climate sentiments via a revision of the lending conditions, have not been considered yet. Nevertheless, they could significantly affect the policies’ outcomes, credit supply and conditions, and financial stability at the bank and systemic level. We contribute to fill this knowledge gap by developing a Stock-Flow Consistent behavioral model of a high income country that embeds a non-linear adaptive function of banking sector’s climate sentiments. With the model, we assess the impact of the introduction of a GSF and a CT on the greening of the real economy and on the credit market conditions. We analyze the risk transmission channels from the credit market to the economy via loans contracts, and of the reinforcing feedback effects that could drive cascading macro-financial shocks. Our results suggest that the GSF could contribute to scale up green investments only in short term, while introducing potential trade-offs on financial stability. To foster the low-carbon transition while preventing unintended effects on firms non-performing loans and households’ budget, the introduction of a CT should be complemented with welfare measures. Finally, climate sentiments could be a game changer for the low-carbon transition by increasing investments’ alignment and preventing the risk of stranded assets.

We study the design features of disclosure regulations that seek to trigger the green transition of the global economy and ask whether such regulatory interventions are likely to bring about sufficient market discipline to achieve socially optimal climate targets. We combine a granular institutional analysis with theoretical and empirical insights from economics and finance. Finance theory and empirical evidence suggest that investors may prefer “green” over “dirty” assets for both financial and non-financial reasons and may thus demand higher returns from environmentally harmful investment opportunities. Investor-led market discipline based on such a cost-of-capital effects can indeed benefit from mandatory transparency requirements and their rigid (public) enforcement, because these requirements prevent an underproduction of the standardized high-quality information that investors need in order to allocate capital according to their preferences. We categorize the transparency obligations stipulated in green finance regulation as either compelling the standardized disclosure of raw data, or providing quality labels that signal desirable green characteristics of investment products based on a uniform methodology. Both categories of transparency requirements can be imposed at activity, issuer, and portfolio level. The normative arguments for stipulating different categories of transparency obligations on different levels depend on the sophistication of investors and their capacity to process and evaluate information, with “green” labels being particularly attractive not only for retail investors. We also identify many forces that may prevent markets from achieving socially optimal equilibria, corporate governance problems and other agency conflicts in intermediated investment chains among them. Therefore, disclosure-centered green finance legislation is a second best to more direct forms of regulatory intervention like global carbon taxation and emissions trading schemes. However, inherently transnational market-based green finance concepts can play a supporting role in the sustainable transition, which is particularly important as long as first-best solutions remain politically unavailable.

This paper leverages the unexpected successful activation of a sea wall built to protect Venice from rising tides to estimate the capitalization into property values of public investment in resilience infrastructure. Using a difference-in-differences hedonic approach with high-frequency microdata on property prices, we show that properties above the sea wall activation threshold experience a permanent reduction in flood risk and expected damages, reflected in higher prices. To account for city-wide effects and potential ex-post government bailouts, we analyze the effect of the second-largest flood in Venice centuries-long history on property prices relative to the mainland as well as data on government claims matched with property elevations. Our findings indicate that capitalized benefits and projected government savings cover approximately 55% (102%) of the sea wall costs in a status-quo (sea-level-rise) scenario. Lastly, based on the stream of projected government savings alone, we calculate a break-even discount rate of 0.7%, which increases to 2.1% under sea-level-rise projections.

We analyze optimal carbon pricing under financial constraints and endogenous climate-related transition and physical costs. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on the strength of physical climate impacts on pledgeable resources. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system may dominate emissions taxes because it can be designed to have a less adverse effect on financial constraints. We also assess how capital structure, carbon price hedging markets, and socially responsible investors interact with emissions pricing, and evaluate other commonly used policy tools.

This research paper explores the critical issue of diversity, equity, and inclusion (DEI) in the workplace and the strategies that can be employed to achieve and sustain a diverse workforce. The research paper is based on a comprehensive review of relevant literature, including peer-reviewed articles, reports, and other relevant documents. The paper aims to contribute to the existing body of knowledge by offering practical recommendations for organisations seeking to enhance DEI in their workplaces. The research methods employed in this study involve a systematic literature review that includes a comprehensive search of electronic databases. The review process was guided by inclusion and exclusion criteria that ensured the selection of relevant and high-quality literature. The study’s findings suggest that organisations can implement various strategies to enhance DEI in the workplace. These strategies include setting DEI goals, providing diversity training, promoting inclusive leadership, implementing flexible work arrangements, and leveraging technology to support DEI initiatives. Additionally, organisations must establish an inclusive culture that recognises and values individual differences, promotes fairness and respect, and provides equal opportunities for all employees. In conclusion, this research paper emphasises the importance of DEI in the workplace and the need for organisations to develop and implement strategies that foster a diverse and inclusive workforce. The study’s findings offer practical recommendations that can guide organisations in achieving and sustaining DEI. Ultimately, organisations prioritising DEI will likely enjoy significant benefits, including increased employee engagement, improved organisational performance, and enhanced innovation and creativity.

Using establishment-level data, we show that firms operating in multiple counties in the United States respond to heat-related damages by reallocating employment from affected to unaffected locations. This reallocation is also observed as an increase in job postings in unaffected locations, and at the extensive margin as opening of new establishments. The reallocation response intensifies with heat-related damage severity being acute, chronic and compound (with other natural disasters), and is especially pronounced among larger, financially stable firms with ESG-oriented investors. This firm-driven reallocation affects how heat shocks impact aggregate outcomes at the county level, including employment growth, wage growth, labor force participation, and establishment entry rate. Specifically, mitigation behavior by multi-establishment firms acts as a “heat insulator” for the economy, reducing the impact of heat shocks on aggregate employment and wage growth while redistributing economic activity across locations.

A frequently voiced concern is that corporate lobbying activities, at least in part, hinder the implementation of ambitious climate policies. We quantify corporate anti- and pro-climate lobbying expenses of U.S.-listed firms and identify the largest corporate lobbyists and their motives. Firms spend on average $277k per year on anti-climate lobbying ($185k on pro-climate lobbying). Anti-climate lobbyists have more carbon-intensive business models, while pro-climate lobbyists exhibit more green innovation. Firms that spend more on anti-climate lobbying earn higher returns because of a risk channel. Our results align with the increasingly common investor view that anti-climate lobbying constitutes an investment risk.

We use administrative credit registry data from Europe to study the impact of voluntary lender net zero commitments. We have two sets of findings. First, we find no evidence of lender divestment. Net zero banks neither reduce credit supply to the sectors they target for decarbonization nor do they increase financing for renewables projects. Second, we find no evidence of reduced financed emissions through engagement. Borrowers of net zero banks are not more likely to set decarbonization targets or reduce their verified emissions. Our estimates rule out even moderate-sized effects. These results highlight the limits of voluntary commitments for decarbonization.

Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed to specific climate transition policies. The results show that while banks’ exposures are meaningful, they are manageable. To view post: https://libertystreeteconomics.newyorkfed.org/2023/07/how-exposed-are-u-s-banks-loan-portfolios-to-climate-transition-risks/ Not Available for Download Add Paper to My Library Share: How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks? Liberty Street Economics Posted: 12 Jul 2023 Hyeyoon Jung Federal Reserve Bank of New York João A. C. Santos Federal Reserve Bank of New York; Nova School of Business and Economics Lee Seltzer Federal Reserve Banks – Federal Reserve Bank of New York Date Written: July 10, 2023 Abstract Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. To view post: https://libertystreeteconomics.newyorkfed.org/2023/07/how-exposed-are-u-s-banks-loan-portfolios-to-climate-transition-risks/ Keywords: banks’ climate risk exposures, climate transition risks, Network for Greening the Financial System (NGFS) scenarios JEL Classification: G2 Suggested Citation: Jung, Hyeyoon and Santos, João A. and Seltzer, Lee, How Exposed Are U.S. (July 10, 2023). Liberty Street Economics , Available at SSRN: https://ssrn.com/abstract=4506914 Not Available for Download 0 References 0 Citations Do you have a job opening that you would like to promote on SSRN? Place Job Opening

Because of the 2015 Paris Agreement, the development of ESG investing and the emergence of net zero emission policies, climate risk is certainly the most important topic and challenge for asset owners and managers now and will remain so over the next five years. It considerably changes portfolio allocation and the investment framework of both passive and active investors. The goal of this paper is to conduct a survey of the various climate risk measures that are available in the asset management industry and the practices of portfolio construction that use these metrics. Therefore, the first part of this paper lists the different climate risk metrics — e.g., carbon footprint, carbon transition pathway, carbon transition and physical risks. The second part is dedicated to portfolio optimization, in particular portfolio decarbonization and portfolio alignment (Paris-based benchmarks and net zero carbon objective). Among the different findings, two are of great importance for investors. First, portfolio decarbonization is more difficult when we include scope 3 carbon emissions. Indeed, optimizing using the sum of scopes 1, 2 and 3 emissions leads to a portfolio with more tracking error risk than using direct plus first tier indirect carbon emissions. Second, portfolio alignment is more complex than portfolio decarbonization. Since aligning portfolios with scope 3 is becoming the standard approach to climate portfolio construction, the impact on portfolio management may be substantial, and the divergence between carbon investing and traditional investing will increase.

We model stakeholder-driven institutional divestiture that promotes stranding of harmful assets through both a political channel and financial prices. We introduce two novel mechanisms. First, institutional divestiture weakens stakeholders’ asset exposures, improving political conditions for stranding. Second, institutional divestiture credibly communicates information about citizen preferences, environmental harm, and economic benefits to financial markets and political participants. These channels drive harmful-asset divestiture, which reduces the asset price and raises its strand probability. Support for divestiture increases under supermajority strand requirements, and when institutions internalize rest-of-world welfare. We detail the equilibrium interactions between information, divestiture, prices, and stranding in a dynamic, rational-expectations game.

We examine the relation between home CEOs and corporate social responsibility (CSR). Our analysis shows home CEOs are associated with higher CSR engagement and increased firm value. These firms exhibit higher asset turnover, lower cost of equity, improved productivity, sales, and profit margins. Home CEOs focus more on community, environmental, and employee-related CSR, and are linked to reduced carbon emissions. This relationship is stronger in firms with higher local business concentration and investor monitoring. Firms led by home CEOs earn higher returns during recent crises. Our results suggest the value increase is not primarily due to agency effects and remain robust to endogeneity concerns. The study indicates a CEO’s community connection may influence CSR effectiveness, suggesting that mere CSR engagement may not suffice to boost trust and value. These results highlight the potential importance of local ties in corporate leadership and CSR strategy.

ESG is one of the most notable trends in corporate governance, management, and investment of the past two decades. It is at the center of the largest and most contentious debates in contemporary corporate and securities law. Yet few observers know where the term comes from, who coined it, and what it was originally aimed to mean and achieve. As trillions of dollars have flowed into ESG-labeled investment products, and companies and regulators have grappled with ESG policies, a variety of usages of the term have developed that range from seemingly neutral concepts of integrating “environmental, social, and governance” issues into investment analysis to value-laden notions of corporate social responsibility or preferences for what some have characterized as “conscious” or “woke” capitalism. This Article makes three contributions. First, it provides a history of the term ESG that was coined without precise definition in a collaboration between the United Nations and major players in the financial industry to pursue wide-ranging goals. Second, it identifies and examines the main usages of the term ESG that have developed since its origins. Third, it offers an analytical critique of the term ESG and its consequences. It argues that the combination of E, S, and G into one term has provided a highly flexible moniker that can vary widely by context, evolve over time, and collectively appeal to a broad range of investors and stakeholders. These features both help to account for its success, but also its challenges such as the difficulty of empirically showing a causal relationship between ESG and financial performance, a proliferation of ratings that can seem at odds with understood purposes of the term ESG or enable “sustainability arbitrage,” and tradeoffs between issues such as carbon emissions and labor interests that cannot be reconciled on their own terms. These challenges give fodder to critics who assert that ESG engenders confusion, unrealistic expectations, and greenwashing that could inhibit corporate accountability or crowd out other solutions to pressing environmental and social issues. These critiques are not necessarily fatal, but are intertwined with the characteristic flexibility and unfixed definition of ESG that was present from the beginning, and ultimately shed light on obstacles for the future of the ESG movement and regulatory reform.

We propose a new measure of ESG-specific skill based on fund manager trades and ESG rating changes. We differentiate between proactive ESG managers, whose trades predict future changes in ESG ratings, reactive ESG managers, who change their portfolio allocation after a change in ESG ratings occurs, and non-ESG managers. The predictive ability of proactive managers is persistent in out-of-sample tests, consistent with manager skill. For identification, we rely on an exogenous methodology change of one ESG rating provider that redefined ESG ratings levels without releasing new information. Reactive managers significantly change their holdings in firms whose ESG ratings exogenously change, consistent with a lack of ESG skill. Proactive managers do not trade in the direction of the change, consistent with their trading no new ESG information. This ESG skill has economic implications: Investors in mutual funds with an explicit sustainability mandate reward proactive managers with 58bps higher average quarterly flows.

We estimate the effect of carbon pricing policy on bank credit to greenhouse gas emitting firms. Our analyses exploit the geographic restrictions inherent in California’s cap-and-trade bill and a discontinuity in the embedded free permit threshold of the federal Waxman-Markey cap-and-trade bill. Affected high emission firms face shorter loan maturities, lower access to permanent forms of bank financing, higher interest rates, and higher participation of shadow banks in their lending syndicates. These effects are concentrated among private firms, while credit terms of public firms are largely unaffected. Overall, we show that banks respond quickly to realizations of transition risk.

We show that socially responsible investors can have a negative impact by slowing down the pace of firm reform. Investors with broad pro-social preferences value acquiring dirty firms with high negative production externalities because they can reform these firms. The anticipation of trading gains for dirty firms decreases the incentive of current firm owners to reduce externalities proactively, potentially causing delay in reform. The presence of financial investors—alongside socially responsible investors—can exacerbate delay. Investment mandates through which socially responsible investors commit to paying a premium for green firms can incentivize reform in a timely manner.

We estimate the supply-side effects of climate change on firm sales by exploiting variation in local average temperature across suppliers of the same client. A 1°C increase in temperature leads to a 2.5% decline in annual sales. This effect is non-linear, with stronger effects among suppliers in regions with the largest temperature increases and in cooler regions. Manufacturing and heat-sensitive industries are more affected, consistent with a reduction in labor productivity and labor supply when temperatures are higher. Non-diversified and financially constrained firms are also more affected, supporting the importance of operational and financial flexibility in adapting to climate change.

Prior research documents a carbon premium in realized returns, assuming they proxy for expected returns and thus the cost of capital. We find that the carbon premium partially reflects unexpected returns and thus outperformance. Companies with higher scope 1, 2, or 3 emissions enjoy superior earnings surprises and announcement returns; earnings announcements explain 20-40% of the annual premium. We find similar results for emissions changes but not intensities, consistent with earlier evidence on realized returns. Our results suggest that the carbon premium, where it exists, partially arises from an unpriced externality rather than the market pricing in carbon transition risk.

At the core, environmental issues like climate change are not primarily technological or economic, but behavioral and cultural. While technological and economic activity may be the direct cause of environmentally destructive behavior, individual beliefs, cultural norms and societal institutions guide the development of that activity. Unfortunately, in addressing environmental problems, we tend to overlook these social dimensions and focus strictly on their technological and economic aspects. We do this in the realm of societal politics, and in the realm of organizational design. This article will redress this lack of attention by considering the social dimensions of a specific issue in the sustainability agenda – climate change. In particular, this article will attend to the social and psychological barriers that exist within individuals and organizations to addressing the issue and offer practical suggestions for overcoming them.

We propose a new methodology to build portfolios that hedge the economic and financial risks from climate change. Our quantity-based approach exploits information on how mutual fund managers trade in response to idiosyncratic changes in their climate risk beliefs. We exploit two types of idiosyncratic belief shocks: (i) instances when fund advisers experience local extreme heat events that are known to shift climate change beliefs, and (ii) instances when fund managers change the language in shareholder disclosures to express concerns about climate risks. We use the funds’ observed portfolio changes around such idiosyncratic belief shocks to predict how investors will reallocate their capital in response to aggregate climate news shocks that shift the beliefs and asset demands of many investors and thus move equilibrium prices. We show that a portfolio that is long stocks that investors tend to buy after experiencing negative idiosyncratic climate belief shocks, and short stocks that investors tend to sell, appreciates in value in periods with negative aggregate climate news shocks. Our quantity-based portfolios have superior out-of-sample hedge performance compared to portfolios constructed using existing alternative methods. The key advantage of the quantity-based approach is that it learns from rich cross-sectional trading responses rather than time-series price information, which is particularly limited in the case of newly emerging risks such as those from climate change. We also demonstrate the versatility of the quantity-based approach by constructing successful hedge portfolios for aggregate unemployment and house price risk.

This handbook in Sustainable Finance corresponds to the lecture notes of the course given at University Paris-Saclay, ENSAE and Sorbonne University. It covers the following chapters: 1. Introduction, 2. ESG Scoring, 3. Financial Performance of ESG Investing, 4. Sustainable Financial Products, 5. Impact Investing, 6. Voting Policy & Engagement, 7. Extra-financial Accounting, 8. Economic Modeling of Climate Change, 9. Climate Risk Measures, 10. Transition Risk Modeling, 11. Portfolio Optimization, 12. Physical Risk Modeling, 13. Climate Stress Testing, 14. Conclusion, 15. Appendix A Technical Appendix, 16. Appendix B Solutions to the Tutorial Exercises.

This paper examines how firms combat climate change and the motivations behind their strategies. Using firm-level carbon emissions and import volume data, we find pervasive evidence of firms outsourcing their emissions to foreign suppliers rather than investing in abatement—a strategy not fully explained by production offshoring, regulatory arbitrage, and supply chain shocks. Instead, our findings reveal that agency problems play a significant role in facilitating corporate carbon outsourcing. While the outsourcing strategy improves short-term profitability, it adversely affects firm value and increases the cost of equity capital, suggesting that investors demand compensation for their exposure to such transition risks.

We study how firm-level carbon emissions affect bank lending and, through this channel, real outcomes in a sample of global firms with syndicated loans. We use bank-level commitments to decarbonization to proxy for changes in banks’ green preferences and, via these commitments, shocks to firms with previous credit from these banks. Firms with higher carbon footprint previously borrowing from committed banks subsequently receive less bank credit. Affected firms also lower their total debt, leverage, size, and real investments, and increase their liquid assets. We find no improvement in environmental performance of brown firms, but only evidence consistent with firms’ greenwashing.

Investors face reduced incentives to finance technological change that devalues their legacy investments. We formalize this “asset overhang” and apply our framework to the climate-banking nexus. Leveraging (1) firm-level data on green innovation & diffusion and (2) the sets of product & technology market peers, we implement a shift-share design that identifies banks’ credit facilities impacted by green firm activities. We find that green firms imposing an asset overhang across all lenders are 3 to 7 p.p. more likely to report tight credit supply conditions. The presence of legacy-free investors mitigates the asset overhang problem, thereby facilitating technological change.

How do firms’ environmental performances affect cross-sectional expected stock returns? Using a third-party ESG score, I find that greener stocks have lower expected returns. This greenium remains significant after controlling for systematic and idiosyncratic risks. Green stocks hedge climate-related disasters, contributing to the greenium. A macro-finance integrated assessment model featuring time-varying climate damage intensity, recursive preferences, and investment frictions quantitatively explains the empirical findings. The model implies a positive covariance between climate damages and consumption, which justifies a high discount rate and a low present value of carbon emission.

We exploit regional variations in exposure to heat stress to study if physical climate risk is priced in municipal bond, corporate bond and equity markets. We find consistent evidence across asset classes that local exposure to heat stress is associated with higher yield spreads for bonds and higher conditional expected returns for stocks. These results are observed robustly starting in 2013–15. The fact that heat stress premium is (a) positive, (b) economically substantial, and (c) present across comprehensive samples of multiple asset classes is consistent with macroeconomic models where climate change has a direct negative impact on aggregate consumption.

The pricing of carbon transition risk is central to the debate on climate-aware investments. This paper documents that emissions grow linearly with firm sales and the data is only available to investors with significant lags. The positive carbon return, or brown-minus-green return differential, documented in previous studies arises from the forward-looking firm performance information contained in emissions rather than risk premium. After accounting for the data release lag, carbon returns turn negative in the U.S. and insignificant globally. Developed markets experience lower carbon returns due to intense climate concern shocks, while countries with stringent climate policies exhibit higher carbon returns.

We study ESG and non-ESG mutual funds managed by overlapping teams. We find that non-ESG mutual funds include more high ESG stocks after the creation of an ESG sibling, and the high ESG stocks they select exhibit superior performance. The low ESG stocks selected by ESG funds also exhibit superior performance and despite being more constrained, the ESG funds outperform their non-ESG siblings. The latter result is consistent with fund families making choices that favor ESG funds. Specifically, ESG funds tend to trade illiquid stocks prior to their non-ESG siblings and get preferential IPO allocations.

In the US, many mortgage borrowers are required by law to maintain flood insurance, but compliance is weakly enforced. Lapsed policies can thus impose high monitoring costs on lenders. Exploiting an exogenous premium rise ($266 per year) which weakens borrowers’ ex-post compliance incentives, I show that lenders increase mortgage denial rates by 0.8 percentage points (3.54% of the mean). This effect is gigantic, 80 times larger than that of lowering one’s annual income by $266. I rule out alternative demand-side explanations and provide evidence to support the mechanism that lenders restrict credit supply ex-ante when facing ex-post monitoring costs.

We study how institutional investors that join climate-related investor initiatives decarbonize their equity portfolios. Decarbonization can be achieved either by re-weighting portfolios towards lower carbon emitting firms or alternatively via targeted engagements with portfolio companies to reduce their emissions. Our findings indicate that portfolio re-weighting is the predominant greening strategy by climate-conscious investors, in particular by those based in countries with carbon emissions pricing schemes. We do not uncover much evidence of engagement even after the 2015 Paris Agreement. Furthermore, we find no evidence that climate-conscious investors allocate capital towards firms developing climate patents, but they do re-weight towards firms starting to generate green revenues. Overall, our analysis raises doubts about the effectiveness of investor-led initiatives in reducing corporate emissions and helping an all-economy transition to “green the planet”.

We study the governance role of EPA regulations in disciplining and incentivizing firms’ environmental strategies by examining their overall effect on corporate innovation and valuation. Using the universe of EPA enacted rules and a difference-in-differences approach exploiting large changes in the restrictions of EPA regulations at the industry level, we find that stricter EPA regulations not only reduce pollution but also increase firm innovation, especially green innovation. Moreover, stricter EPA regulations, especially innovation-related ones, are associated with an improvement in firm value, and the positive valuation effect is stronger for firms subject to higher threats of weak corporate governance and managerial myopia. Our results suggest that properly designed environmental regulations can serve as an external governance mechanism and benefit firms by overcoming inefficiencies in internal governance.

In a 2010 special report, The Economist magazine termed the resurgence of state-owned, publicly listed enterprises “Leviathan Inc.” and criticized the poor governance and low efficiency of these firms. We compile a new comprehensive dataset of state ownership of publicly listed firms in 44 countries over the period of 2004–2017 and show that state-owned enterprises are more responsive to environmental issues. The effect is more pronounced in economies lacking energy security and strong environmental regulation, and among firms with more local operations and higher domestic government ownership. We find a similar effect on corporate social engagement but not on governance quality. These results suggest a different role for “Leviathan Inc.,” especially in dealing with environmental externalities.

Prior research documents a carbon premium in realized returns, assuming they proxy for expected returns and thus the cost of capital. We find that the carbon premium partially reflects unexpected returns and thus outperformance. Companies with higher scope 1, 2, or 3 emissions enjoy superior earnings surprises and announcement returns; earnings announcements explain 20-40% of the annual premium. We find similar results for emissions changes but not intensities, consistent with earlier evidence on realized returns. Our results suggest that the carbon premium, where it exists, partially arises from an unpriced externality rather than the market pricing in carbon transition risk.

We test the signaling view of corporate social responsibility (CSR) engagement using two complementary quasi-natural experiments that impose exogenous negative pressure on stock prices. Firms under such adverse price pressure increase CSR activities compared to otherwise similar firms. This effect concentrates among firms with stronger signaling incentives, namely, those facing greater information asymmetry, more product market competition, higher shareholder litigation risk, and higher stock price crash risk. Firms under the exogenous negative price pressure mainly improve CSR strengths, including costly environmental investments. We also find that CSR engagement attracts socially responsible investors and lowers cost of capital for signaling firms.

Do capital markets reflect the possibility that fossil fuel reserves may become “stranded assets” in the transition to a low carbon economy? We examine the relation between oil firms’ value and their proved reserves. Using a sample of 600 North American oil firms for the period 1999 to 2018, we document that while reserves are an important component of oil firm value, the growth of these reserves has a negative effect on firm value. This negative effect on value is stronger for oil producers with higher extraction costs. When we decompose total reserves into developed and undeveloped reserves, we show that the negative effect of reserves growth on value is due to firms growing their undeveloped oil reserves. Unlike developed, undeveloped reserves require major capital expenditures and longer time before they can be extracted. We also document that the negative effect is stronger for undeveloped oil reserves located in countries with strict climate policies. Our evidence is consistent with markets penalizing future investment in undeveloped reserves growth due to climate policy risk. High level of institutional ownership, stock market liquidity and analyst coverage do not change the negative effect of undeveloped reserves growth on firm value.

This study uses disaggregated establishment-level data to identify a firm’s exposure to physical climate risk and examines investors’ reaction to natural disasters in both the U.S. corporate bond and stock markets. We find that, when a firm is exposed to disasters, investors overreact by depressing the current bond and stock prices, causing future returns to be higher. However, firms with a strong environmental profile experience lower selling pressure on their bonds and stocks, even though their fundamentals weakened following disasters. The evidence suggests that corporate investment in improving environmental profiles pays off when climate change risk is materialized.

This paper analyzes how small-firm employment responds to labor productivity risk. We use highly granular data about firms employing workers whose productivity depends on the weather. This allows us to analyze the effects of exogenous fluctuations in labor productivity risk, induced by weather risk. We find that the risk reduces the firms’ employment, with a stronger effect on the firms in locations where the regional banks have relatively little equity capital. We also find that, in these locations, the banks’ borrowers receive less liquidity from their banks if the locations are subject to adverse weather shocks. It appears that bank capitalization affects small firms’ capacity to take labor productivit risk by changing their access to liquidity “insurance”. Well-capitalized banks support economic adaptation to weather-induced labor productivity risk.

How does demand uncertainty affect firms’ investment decisions? We consider this issue from the perspective of electricity-producing firms and their planned investments in new power plants. Using plausibly exogenous variations in temperature predictions across scientific climate models to measure uncertainty about future electricity demand, we find that uncertainty increases investments in plants with flexible production technologies but depresses non-flexible investments. The net effect of uncertainty on investments is positive if firms have access to flexible investment opportunities. These results are consistent with models in which the impact of uncertainty on investments depends on the investments’ production flexibility.

We examine whether shareholder votes in environmental and social (ES) proposals are informative about firms’ ES risks. ES proposals are unique in that they nearly always fail. We examine whether mutual funds’ support for these failed proposals contains information regarding the ES risks that firms face. Higher support in failed ES proposals predicts subsequent ES incidents, the effects of these incidents on shareholder value, and firms’ overall stock returns. Examining the detailed records of fund votes, we find that agency frictions amongst a group of shareholders contribute to proposal failure.

The search for a relation between environmental, social, and governance (ESG) criteria and corporate financial performance (CFP) can be traced back to the beginning of the 1970s. Scholars and investors have published more than 2,000 empirical studies and several review studies on this relation since then. The largest previous review study analyzes just a fraction of existing primary studies, making findings difficult to generalize. Thus, knowledge on the financial effects of ESG criteria remains fragmented. To overcome this shortcoming, this study extracts all provided primary and secondary data of previous academic review studies. Through doing this, the study combines the findings of about 2,200 individual studies. Hence, this study is by far the most exhaustive overview of academic research on this topic and allows for generalizable statements. The results show that the business case for ESG investing is empirically very well-founded. Roughly 90% of studies find a non-negative ESG-CFP relation. More importantly, the large majority of studies reports positive findings. We highlight that the positive ESG impact on CFP appears stable over time. Promising results are obtained when differentiating for portfolio and non-portfolio studies, regions, and young asset classes for ESG investing such as emerging markets, corporate bonds, and green real estate.

We study how ESG investing reshapes information aggregation by prices. We document that the information content of asset prices changes with ESG investing. We then develop a rational expectations equilibrium model in which traditional and green investors are informed about financial and ESG performances of a firm but have different preferences about them. Two investor groups trade in opposite directions based on the same information, resulting in a potential multiplicity of equilibrium price. The growth of green investors and an improvement in ESG information quality can reduce price informativeness about a firm’s financial performance and raise its cost of capital.

The rise of sustainable finance, ESG investment, and sustainability reporting, has gradually led to a growing disconnect among many financial-sector and corporate stakeholders, which can be observed between their positive sustainability performance claims and the organizational resources and capacities dedicated to assuring proper ESG integration and sustainability impact MRV. These discrepancies can easily result in greenwashing or carbonwashing, which are the practices of marketing products or services as “green”, “sustainable”, “carbon neutral”, “net zero” or “nature positive” when in fact they do not meet basic environmental, climate, or sustainability standards of verifiability or credibility. Competence greenwashing is the professional ESG skills-related equivalent that relates to overstated claims of environmental competence or non-financial sustainability-related expertise in absence of material or credible educational or professional track records. However, greenwashing and its subvariants like “carbonwashing” or “competence greenwashing” do not occur in a contextual vacuum but are strongly linked to the increasing appeal of sustainable finance, ESG investing, and the strong green growth they are supporting. Therefore, this paper will first illustrate recent green growth trends in the areas of sustainable finance and ESG investing before exploring how greenwashing and subject matter expertise-related competence greenwashing have been increasing alongside those trends.

Using administrative employer-employee matched data, we provide evidence that workers earn substantially lower wages in more sustainable firms. Examining both cross-sectional and time-series heterogeneity, we find that the wage gap is larger for high-skilled workers and increasing over time. We hypothesize that this Sustainability Wage Gap arises because workers with preferences for sustainability accept lower wages to work in more environmentally sustainable firms. Using a battery of additional tests, we argue that our results are difficult to reconcile with many alternative interpretations suggested in prior research such as a better work-life balance or better career opportunities.

We investigate carbon risk in global equity prices. We develop a measure of carbon risk using industry standard databases and study return differences between brown and green firms. We observe two opposing effects: Brown firms are associated with higher average returns, while decreases in the greenness of firms are associated with lower announcement returns. We construct a carbon risk factor-mimicking portfolio to understand carbon risk through the lens of a factor-based asset pricing model. While carbon risk explains systematic return variation well, we do not find evidence of a carbon risk premium. We show that this may be the case because of: (1) the opposing price movements of brown firms and firms becoming greener, and (2) that carbon risk is associated with unpriced cash-flow changes rather than priced discount-rate changes. We extend our analysis to different geographic regions and time periods to confirm the missing risk premium.

Media reports of negative environmental incidents harm firms’ reputation and economic performance, with a significant share of these incidents emerging from supply chain operations. At the same time, firms increasingly engage their suppliers to enhance supply chain transparency by joining voluntary programs such as the Carbon Disclosure Project Supply Chain Program (CDP SCP). CDP SCP membership allows buying firms to signal their efforts to stakeholders, encourage supplier improvements, and potentially mitigate the frequency of reported incidents (supplier engagement mechanism). However, drawing attention to improvement efforts might also attract media investigations, inadvertently increasing reported incidents (spotlight mechanism). Thus, we ask, does CDP SCP membership affect the frequency of negative environmental supply chain incidents as reported by the media? What are the dominant mechanisms? We address these questions using secondary data from the CDP SCP, RepRisk, and others. Our quasi-experimental methodology involves coarsened exact matching and two-way fixed effects estimation to compare reported incidents across 12,612 buyer-year observations, encompassing 124 CDP SCP members and 1,148 matched control firms. Our results indicate that CDP SCP membership increases reported incidents, despite performance improvements at the supplier-level, providing support for a dominant spotlight mechanism. Our study extends extant research by revealing a novel interorganizational dynamic: reported incidents can be triggered not just by negative events at the supplier-level, but by pro-environmental initiatives at the buyer-level. Our findings suggest that firms can strategically leverage this interorganizational spotlight mechanism to crowdsource environmental monitoring in supply chains while developing capabilities to manage reputational and economic risks.

We investigate the real effects of mandatory climate-related disclosure by financial institutions on the funding of carbon-intensive industries. Our impact metric is the amount invested into securities, bonds and stocks, issued by fossil fuel companies. A French law, which came into force in January 2016 in the aftermath of the Paris Agreement on climate change, provides us with a quasi-natural experiment. The new regulation, unique in Europe at that time, requires institutional investors (i.e., insurers, pension funds and asset management firms), but not banks, to report annually on both their climate-related exposure and climate change mitigation policy. Using a unique dataset of security-level portfolio holdings by each institutional sector in each euro area country, we compare the portfolio choices of French institutional investors with those of French banks and financial institutions located in other countries. We find robust evidence that French investors subject to the new disclosure requirements curtailed their financing of fossil energy companies compared to other investors in the euro area.

Banks price physical climate change risks after observing natural disasters linked to climate change. We isolate this updating process by identifying loans to borrowers at risk of, but not directly affected by, such disasters. Loan spreads for these borrowers spike in both primary and secondary markets following these disasters, while no such updating occurs for non-climate-related disasters. Banks adjust internal probabilities of default, consistent with a higher perceived credit risk. However, the observed increase in spreads is primarily explained by salience bias, as it is short-lived and amplified by media attention. This salience impacts financial decisions at bank-dependent firms.

We develop a novel method to infer intra-quarter trading of individual mutual funds. After a mutual fund executes a trade, its reported portfolio return deviates incrementally from its quarter-end-holdings-based return, which enables us to infer the transaction date and amount using publicly available data. We then apply our method to analyzing mutual funds’ strategic trading of ESG stocks. In the post-2015 period, mutual funds consistently buy (sell) high- (low-) ESG stocks before quarter ends and reverse their trades shortly after. This trading pattern is particularly pronounced among mutual funds near the cutoffs of extreme ESG rating categories.

We study equilibrium asset prices in an economy where consumers prefer green over brown goods. We show that goods’ price demand elasticity affects the riskiness of financial assets: when elasticity is high, green assets are riskier than brown; when it is low, green assets act as hedges. This mechanism implies that the Green-Minus-Brown (GMB) return spread increases with demand elasticity. The resulting cross-sectional variation in discount rates has real consequences: greenness is particularly valuable for firms in inelastic product markets, leading to a stronger capital allocation tilt toward those firms. We find supportive empirical evidence for these predictions: the annual GMB spread is 6% for high–demand–elasticity firms and −3.6% for low–demand–elasticity firms; valuation losses following ESG scandals are larger for low–demand–elasticity firms; and capital investment exhibits a green tilt that weakens with demand elasticity.

Banking crises in emerging markets in the 1990s were associated with major macroeconomic disruptions: sharp increases in interest rates, large currency depreciations, output collapses and lasting declines in the supply of credit. Bank credit has since recovered in a number of countries, and there have been significant changes in banking structure, performance and risk management capacity. Drawing on contributions by senior central bank officials from emerging market economies and staff of the Bank for International Settlements, the volume seeks to shed light on recent developments by addressing five broad topics. Recent trends in bank credit After peaking in the second half of the 1990s, bank credit to the private sector has recently risen in a number of emerging market economies, partly because of stronger demand for loans associated with robust growth and low interest rates, and partly because of greater supply of loans associated with improved bank balance sheets. The share of bank credit to the business sector has nonetheless declined in part because lagging investment spending has curbed corporate loan demand, and also because of the availability of financing in bond and equity markets. In some countries risk averse banks have held government securities rather than lend to the corporate private sector. Financial institutions have increased lending to households but this exposes them to new forms of risk, as illustrated by difficulties in the credit sector in Korea earlier in this decade. One concern is that banks in some countries have transferred a significant amount of interest rate or exchange rate risk to households through floating rate credit or loans denominated in foreign currency. The pace of structural change Banking systems in emerging economies have been transformed by privatisation, consolidation and foreign bank entry. Bank efficiency and performance have improved, apparently in response to a more competitive climate. More recently, reforms appear to have slowed, in part because the easy work had been done and because of alternative approaches to reform. For example, rather than engaging in full scale privatisation, countries like China and India are only gradually transferring ownership of major state-owned banks to the private sector. As for bank consolidation, it has been market-driven and foreign banks have played an important role in central and eastern Europe and Mexico, while the state has played a larger role in Asia. Increased concentration was not seen as a threat to competition and access to bank financing had improved with the growing presence of foreign banks. However foreign banks raised political concerns because of perceived high profits and were also difficult to supervise because parent banks’ global goals and information flows did not always coincide with the needs of host country supervisors. Evolution in and management of risks facing banks Macroeconomic vulnerabilities (particularly to external shocks) appear to have declined, reflecting a mix of favourable temporary conditions as well as improved policies (higher foreign reserves, more flexible exchange rates, domestic debt market development and improved fiscal policies). However, some central banks were still concerned about vulnerability to certain shocks (eg to domestic demand, to increases in oil prices or interest rates or declines in property prices), particularly given the exposure of banks to interest rate or exchange rate risk and the need in some countries for further fiscal consolidation. Banks increasingly relied on systematic risk assessment procedures and quantitative risk management techniques, with lending being influenced less by government direction or special bank relationships with borrowers. However, challenges still arose from lack of data on loan histories for estimating default probabilities, and risks related to liquidity and credit risk transfer. Regarding liquidity risk, there is a need to ensure that banks rely on the interbank markets, rather than the central bank for liquidity. Regarding credit risk transfer, notwithstanding significant benefits associated with the growing use of credit risk transfer instruments, their rapid spread might in some cases outpace the capacity of financial institutions to assess and price risks. Preventing systemic banking crises One indicator of stronger banking systems is that the volatility of output and inflation has fallen in emerging market economies while their capital ratios have risen significantly. This reflects (i) policies designed to improve bank governance and information disclosure that enhances market discipline, (ii) regulatory measures to dilute risk concentration, limit connected lending, establish realistic provisioning rules and to improve inspection process; (iii) the evolution in supervisory strategy from “ratio watching” (checking bank positions against predetermined prudential ratios) to examining the bank’s risk management process. The ability to take early action to deal with incipient problems before a crisis develops has also been enhanced by increased authority, independence and legal protection for supervisors. At the same time, explicit and limited deposit insurance has helped make clear that not all bank deposits are guaranteed by the government. The payment of fixed premia have encouraged banks to monitor the strictness/effectiveness of supervisory authority and ensured weak banks share the burden of any payouts. Some of these improvements have been helped by efforts to adopt international standards for best practice (Basel Core Principles for Effective Banking Supervision, Basel I and Basel II) and outside assessments of financial stability (ie Financial Sector Assessment Programs, or FSAPs). Challenges remain, including changing the culture in supervisory agencies as well as audit departments of banks towards more effective risk management, and the lack of adequately trained staff. Changing financial intermediation: implications for monetary policy Bank deregulation and global integration has on the one hand made monetary policy in emerging markets more potent by allowing a wider range of transmission channels, including asset market and exchange rate channels. Domestic bank loan rates also appear to be more responsive to changes in money market rates in countries with profit-driven banking systems, perhaps reflecting the recovery in the health in banking systems (pass through is lower in countries with weak bank systems eg post 1997-1998 crisis). On the other hand, external factors unrelated to monetary policy have also shaped bank behaviour. For example, demand for bank deposits has depended on exchange rate expectations. Global integration had also led to some convergence in long-term interest rates.

We study the implications of model uncertainty in a climate-economics framework with three types of capital: “dirty” capital that produces carbon emissions when used for production, “clean” capital that generates no emissions but is initially less productive than dirty capital, and knowledge capital that increases with R&D investment and leads to technological innovation in green sector productivity. To solve our high-dimensional, non-linear model framework we implement a neural-network-based global solution method. We show there are first-order impacts of model uncertainty on optimal decisions and social valuations in our integrated climate-economic-innovation framework. Accounting for interconnected uncertainty over climate dynamics, economic damages from climate change, and the arrival of a green technological change leads to substantial adjustments to investment in the different capital types in anticipation of technological change and the revelation of climate damage severity.

We analyze firms’ carbon reduction strategies worldwide and identify one key channel: large, primarily European firms facing increased investor pressure divest pollutive assets to firms that are less in the limelight. There is no evidence of increased engagement in other emission reduction activities. We estimate that 369 million metric tons (mt) of CO2e are reallocated via divestments in the post-Paris Agreement period, shifting pollutive assets from Europe to the rest of the world. Our results indicate significant global asset reallocation effects and imply that responsible investors who want to truly invest responsibly need to monitor firms’ divestment strategies closely.

Using comprehensive auto loan data, we find that early-stage electric vehicles (EVs), compared to their internal combustion engine counterparts within the same model series, are financed with higher interest rates, lower loan-to-value ratios, and shorter durations. This financing gap is driven by lower and more volatile resale values of early-stage EVs, stemming from rapid technological advancements in EV-specific technologies. This technological obsolescence raises collateral risk, leading to tighter loan terms. Other factors, such as buyer preferences, socioeconomic traits, government incentives, and macroeconomic conditions, have minimal impact. Our findings show that technological carbon-transition risks are reflected in household finance products.

This paper analyzes the effect that the U.S. Supreme Court’s landmark decision on Citizens United vs. FEC had on corporate political activism. The decision opened the door for corporate treasuries to engage in independent political spending. Politically connected firms have lower announcement returns at the ruling than non-connected firms. The estimates suggest that the value of a political connection decreases by $6.9 million. To evaluate the effect of Citizens United on corporate political activism, we explore the fact that Citizens United also lifts bans on independent political spending in states where such bans existed. After the ruling, firms headquartered in states where bans are lifted have fewer state-level connections relative to firms in other states. Overall, our evidence supports the hypothesis that independent political spending crowds out political connections. We do not find any significant crowding-out effects of independent political expenditures on lobbying activity, executive contributions, and political action committees (PAC) contributions.

This paper tests whether very diversified and patient investors, also known as universal owners, tend to vote in favor of shareholder resolutions instructing corporations to reduce or communicate on the negative externalities they produce. Our sample includes 213 US fund families that voted on 13,108 different shareholder resolutions at 2,352 companies over the period from 2013 to 2016. We find that, contrary to the common ownership logic, universal owners’ support for issues related to externalities is lower than the one of otherwise similar fund families. Instead, support is positively associated with the proportion of socially responsible investment funds in the family. We discuss various practical implications of our results.

A key aspect of the governance process inside organizations and markets is the measurement and disclosure of important metrics and information. In this chapter, we examine the effect of sustainability disclosure regulations on firms’ disclosure practices and valuations. Specifically, we explore the implications of regulations mandating the disclosure of environmental, social, and governance (ESG) information in China, Denmark, Malaysia, and South Africa using differences-in-differences estimation with propensity score matched samples. We find that relative to propensity score matched control firms, treated firms significantly increased disclosure following the regulations. We also find increased likelihood by treated firms of voluntarily receiving assurance to enhance disclosure credibility and increased likelihood of voluntarily adopting reporting guidelines that enhance disclosure comparability. These results suggest that even in the absence of a regulation that mandates the adoption of assurance or specific guidelines, firms seek the qualitative properties of comparability and credibility. Instrumental variables analysis suggests that increases in sustainability disclosure driven by the regulation are associated with increases in firm valuations, as reflected in Tobin’s Q. Collectively, the evidence suggest that current efforts to increase transparency around organizations’ impact on society are effective at improving disclosure quantity and quality as well as corporate value.

We use textual analysis to measure the growing concern about climate issues and to assess its impact on stock prices in the United States. Using a dataset of 71,785 articles published in The Wall Street Journal from 2010 to 2019, we create several scores capturing media coverage of environmental issues and investigate their influence on S&P500 constituents in a Fama-French model. We find a significant impact of green sentiment on the stock returns of nearly 25% of firms. The response varies across the different sectors. The effect is negative in energy and materials, particularly in chemicals and metals. A positive impact is found in real estate and utilities. An assessment of the results at company level shows that this impact is related to their environmental performance. The results are robust to the use of alternative lexicons and weighting schemes, various specifications and sample periods.

We investigate whether CEOs around the world are held accountable for stakeholder-related corporate misbehavior. The likelihood of CEO turnover increases significantly when the media coverage of the ESG incidents reaches extreme levels. CEO turnovers occur even in the cases where an incident does not lead to a stock price decline. In such cases, the board likely has a non-pecuniary motive for the turnover. This suggests that such non-pecuniary reputational concerns are an important determinant of CEO turnover decisions around the world, especially when the firm is facing intense public pressure due to stakeholder-related corporate misbehavior. This effect is more pronounced when firms are headquartered in stakeholder-oriented countries like many European countries.

There are many benefits to investing in hedge funds, particularly when using a diversified multi-strategy approach. Over the recent years, multi-strategy funds of hedge funds have flourished and are now the favorite investment vehicles of institutional investors to discover the world of alternative investments. More recently, funds of hedge funds that specialize within an investment style have also emerged. Both types of funds put forward their ability to diversify risks by spreading them over several managers. However, diversifying a hedge fund portfolio also raises a number of issues, such as the optimal number of hedge funds to really benefit from diversification, and the influence of diversification on the various statistics of the return distribution (e.g. expected return, skewness, kurtosis, correlation with traditional asset classes, value at risk and other tail statistics). In this paper, using a large database of hedge funds over the 1990-2001 period, we study the impact of diversification on naively constructed (randomly chosen and equally weighted) hedge fund portfolios. We also provide some insight into style diversification benefits, as well as the inter-temporal evolution of diversification effects on hedge funds.

Environmental, social, and governance (ESG) ratings are widely used in practice but lack evidence of their underpinning. We find that firms sharing the same major shareholders with the rater (“sister firms”) receive higher ESG ratings. We make causal inference for the ownership effect by exploiting an acquisition event that created sister firms exogeneously. Sister firms receive higher ratings when the common owners have larger stakes in the ESG rater. Notwithstanding their initial higher ratings, sister firms have poorer future ESG outcomes. These findings cast doubt on the quality of ESG ratings and caution practitioners and regulators.

Institutional investors affected by hurricanes subsequently support environmental proposals in non-affected firms even if they never voted for similar initiatives. Affected investors raise their holdings in firms where their pro-environment votes are consequential. The increased voting support after hurricanes has real effects as environmental proposals endorsed by more hurricane-afflicted investors are more likely to pass. Moreover, both market capitalization and analysts’ recommendations decline after firms pass environmental proposals. Our evidence suggests that natural disasters raise institutional investors’ concerns about the environment and about potential fund flow disruptions. These concerns, in turn, influence environmental activism, corporate policies, and firm performance.

This paper examines the effects of environmental, social, and governance (ESG) disclosure, on investment efficiency, using the adoption of Directive 2014/95/EU as a quasi-natural, shock on disclosure quality. We document a significant and robust reduction of underinvestment, for U.S. firms exposed to the Directive. Investment efficiency gains are strongest for firms with, ex-ante lower ESG disclosure levels, that are financially constrained, and for firms with more, entrenched managers. Underinvesting firms exposed to the shock raise more debt ex-post and, the additional debt is used to reduce underinvestment. These results suggest that non-financial, disclosure can play a role in mitigating information asymmetry in debt markets.

This paper studies the development of a firm’s Environmental, Social, and Governance (ESG) performance following the issuance of “green loans” earmarked for green projects versus “sustainable loans” to firms bench-marked by ESG criteria. Firms issuing green loans appear to be effective in shrinking their environmental emissions; however, they weaken in social performance indicated by a decrease in their human rights, community, and product responsibility scores. This implies that they prioritize their environmental goals, yet neglect their commitment towards their clients and society. Sustainable loans, on the other hand, we find to incentivize firms to improve their ESG performance by increasing their environmental and governance scores. Thus, the issuance of a sustainable loan surely precedes (and may consequentially signal) subsequent improvements in a firm’s overall ESG performance.

We show that U.S. firms cut imports by 31.8% when their international suppliers experience environmental and social (E&S) incidents. These trade cuts are larger for publicly listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation, suggesting that E&S preferences in capital markets can be privately costly but have real effects for foreign suppliers. Larger trade cuts around the incident result in better supplier E&S performance in subsequent years, and in the eventual resumption of trade. Our results highlight the role of investors in ensuring suppliers’ E&S compliance along global supply chains.

This paper analyzes how climate risks are priced on financial markets. We show that climate tipping thresholds, disagreement about climate risks, and preferences that price in long-run risks are crucial to an understanding of the impact of climate change on asset prices. Our model simultaneously explains several findings that have been established in the empirical literature on climate finance: (i) news about climate change can be hedged in financial markets, (ii) the share of green investors has significantly increased over the past decade, (iii) investors require a positive, although small, climate risk premium for holding “brown” assets, and (iv) “green” stocks outperformed “brown” stocks in the period 2011-2021. The model can also explain why investments in mitigating climate change have been small in the past. Finally, the model predicts a strong, non-linear increase in the marginal gain from carbon-reducing investments as well as in the carbon premium if global temperatures continue to rise.

This paper establishes that mutual funds strategically time the trades of ESG stocks around disclosure to inflate their sustainability ratings. This claim is supported by four analyses. First, we show that funds’ ESG betas increase shortly before disclosure and decrease shortly afterwards. Second, we establish that funds outperform the portfolios they disclose. Third, we document an increase in ESG buys (sells) before (after) disclosure based on imputed fund trades. Fourth, we provide evidence that ESG stock prices temporarily rise before disclosure and decline afterwards. Overall, we document that green window dressing positively impacts fund sustainability ratings, performance, and flows.

I study the impact of lenders’ environmental responsibility. My empirical setting exploits the U.S. Lender Liability Act of 1996, which reduced lenders’ exposure to the environmental clean-up costs attached to some of their debtors’ collateral. I find that affected debtors increase toxic releases, commit 17.54% more environmental regulatory violations, and reduce investment in pollution reduction activities. High polluters incur lower borrowing costs and use longer debt maturity after the shock. The paper supports the view that stricter environmental liability rules lead lenders to increase borrowing costs in response to poor environmental practices conducted by their debtors.

The financial risks of climate change, understood as the potential for negative impacts from climate change on business profitability or survival, have received a lot of attention. The recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosure have set the agenda for this discussion. The Task Force report is complemented by another report, also in 2017, from Cicero Centre for International Climate and Environmental Research in Oslo: Shades of Climate Risk for investors, which is also directly relevant and applicable for decision-makers in the non-financial industry, such as corporate boards. Although praiseworthy for contributing to awareness-raising of the significance of climate change for business and finance, both initiatives have short-comings when analysed in the context of a research-based sustainability perspective. Even limiting the scope to climate change, important aspects are excluded in the two reports. After briefly discussing these shortcomings in Section 1, I outline in Section 2 the concept of sustainability within which I position the discussion of financial risks. In Section 3, I present what I hope will be the start of a full analysis of the financial risks of unsustainability. In Section 4, I conclude with some reflections on this as a preliminary research agenda, welcoming engagement with other scholars in the area.

Using lenders who become members of the Task Force on Climate-Related Financial Disclosures (TCFD) as a plausible exogenous shock, we examine whether and how lenders’ commitment to transparent climate-related disclosures affects borrower firms’ environmental performance. We find that borrower firms of TCFD-member lenders, relative to control firms, significantly improve their environmental performance after the TCFD launch. This effect is concentrated among polluting borrower firms. Our analysis further reveals that lenders’ climate-related disclosure commitments influence borrower firms’ environmental performance through both credit rationing and monitoring mechanisms. Specifically, polluting borrower firms face higher borrowing costs, reduced access to credit, and increased incorporation of environmental action covenants in their loan agreements. Additionally, polluting borrower firms of TCFD-member lenders experience heightened financial constraints. Finally, borrower firms of TCFD-member lenders are more likely to adopt the TCFD framework for climate-related disclosure after the TCFD establishment. Together, these findings shed light on the role of lenders in driving corporate environmental performance improvement through their commitment to transparent climate-related disclosures.

We provide large-sample evidence on whether U.S. publicly traded corporations use voluntary disclosures about their commitments to employee diversity opportunistically. We document significant discrepancies between companies’ external stances on diversity, equity, and inclusion (DEI) and their hiring practices. Firms that discuss DEI excessively relative to their actual employee gender and racial diversity (“diversity washers”) obtain superior scores from environmental, social, and governance (ESG) rating organizations and attract more investment from institutional investors with an ESG focus. These outcomes occur even though diversity-washing firms are more likely to incur discrimination violations and have negative human-capital-related news events. Our study provides evidence consistent with growing allegations of misleading statements from firms about their DEI initiatives and highlights the potential consequences of selective ESG disclosures.

I study the effect of risk-based flood insurance pricing on welfare and climate damages in the U.S. I estimate my results with flood insurance policy data and a novel survey measuring property-level flood insurance demand, risk perceptions, and objective flood risk. To identify the effects of risk-based premiums, I use variation created by outdated flood maps that caused high-risk homes to be misclassified as low-risk. My findings show that higher premiums are both a price and information signal. Owners of high-risk homes misclassified as low-risk underestimate their current and future flood risk, invest less in risk-reducing adaptation, and buy less flood insurance despite having lower premiums. Embedding these estimates in a sufficient statistics model with dynamic risk and endogenous risk beliefs and adaptation, I find that accurately classifying a new high-risk home increases welfare by $25,000 and reduces its dynamic climate damages by 50%.

Despite growing concerns from regulators about potential price discrimination against, sustainable investors, empirical evidence is lacking. To address this gap, we conduct two, lab-in-the-field experiments with 415 professional financial advisors from the US and Europe. Our results show that these advisors impose a premium on sustainable investors, compared to conventional investors. This premium persists even when differences in, effort, skill, and costs, as well as higher gains from trade are ruled out. Notably, advisors, charge the highest fees to sustainable investors with low financial literacy, while, sustainable investors with high financial literacy pay no premium at all. These results, are consistent with price discrimination. Financial regulators evaluate our results and, provide policy implications.

We measure the gains from phasing out coal as the average social cost of carbon times the quantity of avoided emissions. By comparing the present value of benefits from avoided emissions against the present value of costs of ending coal and replacing it with renewables, our conservative baseline estimate is that the world can realize a net gain of $85 trillion. This global net social benefit can be attained through an international agreement to phase out coal. We also explore how this net benefit is distributed across countries and find that most countries would benefit from a global coal phase-out even without any compensatory cross-country transfers. Finally, we estimate the size of public funds that must be committed under a blended finance arrangement to finance the cost of replacing coal with renewables.

Firms increasingly borrow via sustainability-linked loans (SLLs), contractually tying spreads to their ESG performance. SLLs vary widely in transparency of disclosure regarding sustainability-related contract details and tend to be issued to borrowers with superior ESG profiles. While high-transparency SLL borrowers maintain this performance, low-transparency SLL borrowers exhibit significantly deteriorating ESG performance after issuance. Both high- and low-transparency borrowers pay substantial fees to obtain SLLs. The results are consistent with high-transparency borrowers using SLLs to “certify” their preexisting ESG commitments, but low-transparency borrowers “greenwashing” with empty SLL labels. Evidence on drawdowns, renegotiations, and stock market reactions further supports these interpretations.

The application of technological innovations to the finance industry (Fintech) has been attracting tens of billions of dollars in venture capital in recent years. Examples of Fintech innovations include digital cash transfer services in Kenya and India, and peer-to-peer lending platforms in China. These services, when developed in tandem with complementary government policies and regulatory frameworks, have the potential to expand financial services to hundreds of millions of people currently lacking access and to break new ground on the way finance is conducted. This is important because sustainable economic growth is strongly linked with financial inclusion. The successful adoption of Fintech to increase financial inclusion is highly dependent on competent regulatory oversight. By examining varying degrees of success in the adoption of Fintech services in Kenya, India and China this paper argues that adopting a responsive regulatory approach, rather than an overly interventionist one, is the most suitable framework for boosting financial inclusion through technological innovation.

We analyze optimal carbon pricing under financial constraints and endogenous climate-related transition and physical costs. The socially optimal emissions tax may be above or below a Pigouvian benchmark, depending on the strength of physical climate impacts on pledgeable resources. We derive necessary conditions for emissions taxes alone to implement a constrained-efficient allocation, and show a cap-and-trade system may dominate emissions taxes because it can be designed to have a less adverse effect on financial constraints. We also assess how capital structure, carbon price hedging markets, and socially responsible investors interact with emissions pricing, and evaluate other commonly used policy tools.

This paper examines how different beliefs about climate risk affect long-horizon portfolio choice. We show that investors who elicit prior views about the economic impact of climate change from a temperature long-run risks model allocate less capital to equities at longer horizons than investors with noninformative prior beliefs and investors who do not believe in global warming. Investors with dogmatic beliefs derived from economic theory perceive stocks to be riskier over longer holding periods because climate change weakens their beliefs in mean reversion and increases estimation risk and uncertainty about future expected returns.

We examine how ESG controversies ripple through the product market and shape consumption. We show that sales of affected products drop by 5–10%, compared to unaffected products consumed by the same household. The contraction is demand-driven, with price adjustments trailing quantity decreases by 1-2 months. Across socio-economic demographics, results are strongest in Democrat-leaning counties and among wealthy millennials, but weakest among equally wealthy baby boomers. Salience about natural disasters, product types, and issues underlying the ESG shocks also heterogeneously affect the response. In summary, we present the first household-level evidence on the financial materiality of ESG, via the consumption channel.

We study the asset market for pollutive plants. Firms divest pollutive plants in response to environmental pressures. The buyers are firms facing weaker environmental pressures, with supply chain relationships or joint ventures with the sellers. While pollution levels do not decline following divestitures, the sellers highlight their sustainable policies in subsequent conference calls, earn higher returns as they sell more pollutive plants, and benefit from higher ESG ratings and lower compliance costs. Overall, the asset market allows firms to redraw their boundaries in a manner perceived as environmentally friendly without real consequences for pollution and with substantial gains from trade.

This study tests the hypothesis that firms with climate-related metrics in their executive pay promote emissions outsourcing to their supply chain. I find that firms with climate-linked pay reduce the direct emissions by shifting them to the suppliers, resulting in no significant change in total emissions. This emissions spillover effect is more pronounced when firms have greater bargaining power over their suppliers and lower supplier switching costs. Specifically, firms with climate-linked pay initiate fewer and terminate more contracts with those “hard-to-shift-emissions” suppliers. Alternative explanations, such as greater efforts in green innovation and divestiture of assets, do not appear to explain my findings.

Carbon regulation poses the corporate challenge of developing optimal carbon management. We provide a unified model characterizing how firms manage emissions through production, heterogeneous green investment, and the trading of carbon credits. We show that carbon pricing generates incentives to reduce emissions but, as it becomes costlier to comply, also leads polluting firms to shift towards immediate yet transient types of green investment—such as abatement instead of green innovation. Green innovation subsidies then complement—rather than substitute—carbon pricing, as they jointly help attain the twofold goal of lowering current emissions and ensuring a faster transition to greener technologies.

We examine the effect of wildfire smoke on establishment-level outcomes and the outlook of the local business environment. Excluding areas directly hit by wildfires, we find that local business establishments lose approximately 10% of sales on days with elevated wildfire smoke. We find no pre-treatment trends, and the effects are larger and longer lasting in consumer-oriented industries, which exhibit a 20% (15%) sales reduction in the year of (after) the smoke shock. Further tests indicate a reduction in retail establishment visits, suggesting that a smoke-induced reduction in local consumer demand is a driver of our results. We confirm the multi-year impacts of smoke shocks on the intensive (i.e., average employees per establishment) and extensive (i.e., relative establishment counts at the county-year level) margins. Long term establishment responses are concentrated in areas where the population is worried about climate change risk, suggesting that transient smoke exposure acts as a salience shock leading to longer term climate adaptation.

Despite growing climate losses, Americans continue to move into high risk areas. This paper uses a range of natural experiments to show how mispricing of climate risk in mortgages and property insurance creates large taxpayer exposures and leads to excess credit flows to risky areas. Our central finding is that the government-sponsored enterprises’ (GSEs) policies for evaluating property insurers are a crucial source of this mispricing. We assemble a comprehensive new dataset on both mortgages and insurance to analyze these dynamics in Florida from 2009-2018. We begin by documenting a breakdown in the quality of insurance provision, with new under-capitalized and under-diversified insurers dominating insurance markets. These fragile insurers have high rates of insolvency, which we show causally increases mortgage defaults after natural disasters. We find that the GSEs’ reliance on third-party ratings of insurers leads them to accept insurance from companies at high risk of insolvency without pricing for it. This creates large taxpayer exposures, with an estimated 31% of the GSEs’ expected losses in Florida coming from insurance fragility. Most starkly, we show that private lenders strategically respond to the GSE mispricing. Mortgage denial rates are sensitive to insurance quality in the jumbo segment where loans are retained, but not in conforming segment where loans are offloaded to the GSEs. Our estimates imply that 1 in 5 GSE-eligible conforming mortgages would not have been originated by private lenders if they internalized insurance fragility risk at origination.

Climate change is increasing the frequency of natural disasters, which could make municipal bonds a riskier asset class. We study the effects of natural disasters on municipal bond returns, exploiting the repeat sales approach to overcome the challenge that municipal bonds trade extremely infrequently. We find substantial price effects that materialize gradually: returns of uninsured bonds fall slowly in the weeks following a disaster, by 0.31% on average, translating into investor losses of almost $10 billion. Source of bond revenue, bond insurance, disaster severity, federal disaster aid, and local financial conditions all affect the magnitude of the price effects.

Below we examine market outliers in financial markets. How much effect do these outliers have on long term performance? Can the investor prepare for these anomalies, or are they truly ‘black swans’ that cannot be managed? In this issue we examine numerous global financial markets on daily and monthly time frames. We find that these rare outliers have a massive impact on returns. However, these outliers tend to cluster and the majority of both good and bad outliers occur once markets have already been declining. We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, demonstrating that a significant majority of the 10 best days and the 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies, and conclude that market timing and risk management is indeed possible, and beneficial to the investor.

Corporate executives managing some of the largest public companies in the U.S. are shaped by their daughters. When a firm’s CEO has a daughter, the corporate social responsibility rating is about 9.1% higher, compared to a median firm. The results are robust to confronting several sources of endogeneity, e.g., examining first-born CEO daughters and CEO changes. The relation is strongest for diversity, but significant also for broader pro-social practices related to the environment and employee relations. Our study contributes to research on female socialization, heterogeneity in CSR policies, and plausibly exogenous determinants of CEOs’ styles.

The number of U.S. publicly traded firms has halved in 20 years. How will this shift in ownership structure affect the economy’s externalities? Using comprehensive data on greenhouse gas emissions from 2007-2016, we find that independent private firms are less likely to pollute and incur EPA penalties than are public firms, and we find no differences between private sponsor-backed firms and public firms, controlling for industry, time, location and a host of firm characteristics. Within public firms, we find a negative association between emissions and mutual fund ownership and board size, suggesting that increased oversight may decrease externalities.

This paper documents evidence that financial constraints increase firms’ toxic emissions given that firms actively trade off abatement costs against potential legal liabilities. Exploring three quasi-natural experiments in which firms’ financial resources are likely exogenously impacted, we find that relaxing financial constraints reduces U.S. public firms’ toxic releases. The effects of financial constraints on toxic releases are amplified when regulatory enforcement weakens and when myopic managers emphasize short-term earnings performance. Overall, our evidence highlights the real effects of financial constraints in the form of environmental pollution, which is a costly negative externality imposed on society and public health.

This paper examines the role of supply-chain relationships for the transmission of corporate Environmental and Social (E&S) policies, and the resulting impact on real E&S outcomes and firm performance. I show that E&S policies propagate from customers to suppliers, especially when customers have higher bargaining power and suppliers are in countries with lower ESG standards. This transmission mechanism matters: suppliers subsequently reduce their toxic emissions, litigation and reputation risk decreases, and financial performance improves. I use staggered E&S regulation changes around the world to establish causality. Global supply-chains act as a transmission mechanism for regulatory requirements and standards across borders.

Homes exposed to sea level rise (SLR) sell for approximately 7% less than observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long horizon SLR costs, we find no relation between SLR exposure and rental rates and a 4% discount among properties not projected to be flooded for almost a century. Our findings contribute to the literature on the pricing of long-run risky cash flows and provide insights for optimal climate change policy.

We find that long-term institutional investors tilt their portfolios towards firms with better ESG profiles, in the cross-sections of both institutional investor portfolios and the ownership of firms. We test whether several theoretically motivated mechanisms can explain this relationship. Our results that long-term investors exhibit patience with firms around poor earnings announcements, but quickly sell portfolio firms after negative ES incidents, support the hypothesis that long term and short term investors evaluate information differently. In addition, our evidence shows that limits-to-arbitrage plays a role as we find investors’ ESG tilting weakens following regulatory shocks that shorten their horizon.

We document that localized policies aimed at mitigating climate risk can have unintended consequences due to regulatory arbitrage by firms. Using a difference-in-differences framework to study the impact of the California cap-and-trade program with United States plant level data, we show that financially constrained firms shift emissions and output from California to other states where they have similar plants that are underutilized. In contrast, unconstrained firms do not make such adjustments. Overall, unconstrained firms do not reduce their total emissions while constrained firms increase total emissions after the cap-and-trade rule, undermining the effectiveness of the policy.

Prior research documents a carbon premium in realized returns, assuming they proxy for expected returns and thus the cost of capital. We find that the carbon premium partially reflects unexpected returns and thus outperformance. Companies with higher scope 1, 2, or 3 emissions enjoy superior earnings surprises and announcement returns; earnings announcements explain 20-40% of the annual premium. We find similar results for emissions changes but not intensities, consistent with earlier evidence on realized returns. Our results suggest that the carbon premium, where it exists, partially arises from an unpriced externality rather than the market pricing in carbon transition risk.

We examine the effect of pay transparency on gender pay gap and firm outcomes. This paper exploits a 2006 legislation change in Denmark that requires firms to provide gender disaggregated wage statistics. Using detailed employee-employer administrative data and a difference-in-differences and difference-in-discontinuities designs, we find the law reduces the gender pay gap, primarily by slowing the wage growth for male employees. The gender pay gap declines by approximately two percentage points, or a 13% reduction relative to the pre-legislation mean. Despite the reduction of the overall wage bill, the wage-transparency mandate does not affect firm profitability, likely because of the offsetting effect of reduced firm productivity.

Socially responsible (SR) institutions tend to focus more on the ESG performance and less on quantitative signals of value. Consistent with this difference in focus, we find that SR institutions react less to quantitative mispricing signals. Our evidence suggests that the increased focus on ESG may have influenced stock return patterns. Specifically, abnormal returns associated with these mispricing signals are greater for stocks held more by SR institutions. The link between SR ownership and the efficacy of mispricing signals only emerges in recent years with the rise of ESG investing, and is significant only when there are arbitrage-related funding constraints.

We construct measures of firms’ beliefs about climate regulation, plans for future abatement, and current emissions mitigation from responses to the Carbon Disclosure Project. These measures vary in a pronounced, distinctive fashion around the Paris announcement. A dynamic model of a representative firm exposed to a future carbon levy, trading-off mitigation against capital growth, facing convex abatement adjustment costs does not fit the data; but a two-firm model with cross-firm information asymmetry and reputational externalities does. Out-of-sample, the model predicts reversals following the US exit from the Paris agreement. We conclude that abatement is strongly affected by firms’ beliefs about climate regulation, and cross-firm interactions amplify the impact of regulation.

Climate change poses new challenges for portfolio management. In our not-yet-low carbon world, investors face a trade-off between minimizing their exposure to climate risks and maximizing the benefits of portfolio diversification. This paper investigates how investors and financial intermediaries navigate this trade-off. After the release of Morningstar’s novel carbon risk metrics in April 2018, mutual funds labeled as “low carbon” experienced a significant increase in investor demand, especially those with high risk-adjusted returns. Fund managers actively reduced their exposure to firms with high carbon risk scores, especially stocks with returns that correlated more with the funds’ portfolios and were thus less useful for diversification. These findings shed light on whether and how climate-related information can re-orient capital flows in a low carbon direction.

We study shareholder support for corporate board nominees in the context of the California gender quota, which was passed in 2018. Using hand-collected data for approximately 600 firms, we show that, prior to the quota, female nominees received greater shareholder support than their male counterparts. This is consistent with a pre-quota environment in which female board nominees were held to a higher standard than male nominees. Second, we show that incumbent female directors in the post-quota environment receive greater support than incumbent men, while support for new (mandated) female nominees decreases to the level of support for new male nominees. This indicates that the quota led to a conversion in the bar for men and women to become board nominees, and that it did not lead to new female board nominees being of lower quality than male nominees. We likewise challenge the notion that the negative stock price reaction to the quota reflects value destruction due to an insufficient supply of female directors. Instead, we provide evidence that dysfunctional board dynamics are driving the reaction, in the sense that stock prices reacted negatively to entrenched boards who failed to turn over the least supported directors when adjusting their boards to comply with the new law.

One of the most pressing questions facing both corporate scholars and businesspeople today is the question of how corporate directors can be made accountable. Before addressing this issue, however, it seems important to consider two antecedent questions: To whom should directors be accountable? And for what? Contemporary corporate scholarship often starts from a “shareholder primacy” perspective that holds that directors of public corporations ought to be accountable only to the shareholders, and ought to be accountable only for maximizing the value of the shareholders’ shares. This perspective rests on the conventional contractarian assumption that the shareholders are the sole residual claimants and risk bearers in a public firm. More recent work in economics suggests, however, that this assumption is false. In particular, options theory and the growing literature on the contracting difficulties associated with firm-specific investment both support the claim that a wide variety of groups are likely to bear significant residual risk and enjoy significant residual claims on firm earnings. These groups include not only shareholders, but also creditors, managers, and employees. Thus economic efficiency may be best served not by requiring corporate directors to focus solely on shareholders’ interests, but by requiring them instead to maximize the sum of all the interests held by all the groups that bear residual risks and hold residual claims. In accord with this view, we argue that corporate directors ought to be viewed not as “agents” who serve only the shareholders, but as “mediating hierarchs” who enjoy ultimate control over the firm’s assets and outputs and who are charged with the task of balancing the sometimes conflicting claims and interests of the many different groups that bear residual risk and have residual claims on the firm. This mediating model of the board’s role offers to explain a variety of important doctrines in U.S. law that preserve director autonomy and insulate the board from the command and control of the shareholders or indeed any other group. At the same time, the mediating model raises the question of why directors who are largely insulated from outside pressures should be expected to do a good job of running the firm. We suggest that answers to this question are available, but only if we are willing to look beyond the homo economicus model of rationally selfish behavior commonly employed in economic analysis and to consider as well the extensive empirical evidence in the social sciences literature on the phenomenon of intrinsically trustworthy, other-regarding behavior. We briefly explore how this literature both supports the claim that directors may behave trustworthily even when they do not have explicit incentive to do so, and suggests some of the circumstances that are likely to promote accountable director behavior.

We investigate the increasingly common practice of CEOs taking public stances on social and political issues (CEO activism). We find that CEO activism stems from a CEO’s personal ideology and its alignment with investor, employee, and customer ideologies. We show that CEO activism results in positive market reactions. Furthermore, firms with CEO activism realize increased shareholdings from investors with a greater liberal leaning, who rebalance their portfolios towards these firms. Our results suggest that investors’ socio-political preferences are an important channel through which CEO activism affects equity demand and stock prices. Notably, CEOs are less likely to be fired when their activist stances generate positive market responses.

The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating the market-based premium associated with carbon-transition risk in a cross-section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.

We survey institutional investors to better understand their role in the corporate governance of firms. Consistent with a number of theories we document widespread behind-the-scenes intervention as well as governance-motivated exit. Both governance mechanisms are viewed as complementary devices, in which intervention typically will occur prior to a potential exit. We find that long-term investors and investors that are less concerned about stock liquidity intervene more intensively. Finally, most investors use proxy advisors and believe that their information improves their own voting decisions.

We develop a real-options approach to evaluate energy assets and potential investment projects under transition scenario uncertainty. Dynamic scenario uncertainty is modelled by assuming that the economic agent acquires the information about the scenario progressively by observing a signal. The problem of valuing an investment is formulated as an American option pricing problem, where the optimal exercise time corresponds to the time of entering into a potential investment project or the time of selling a potentially stranded asset. To illustrate our approach, we apply representative scenarios from integrated assessment models to the examples of a coal-fired power plant without Carbon Capture and Storage (CCS) and potential investment into a biomass power plant with CCS.

The explosion of the BP-leased Deepwater Horizon and subsequent oil spill stands as an indictment not just of our national energy priorities and environmental law enforcement; it equally represents a failure of Anglo-American corporate law and what passes for corporate social responsibility in business today. Using BP and the disaster as a compelling case study, this Article examines green marketing and corporate governance and identifies elements of each that encourage firms to engage only superficially in corporate social responsibility yet trumpet those efforts to eager consumers and investors. The Article then proposes reforms and protections designed to increase corporate social responsibility, root out greenwashing, and recognize liability for corporate social responsibility frauds on consumers and investors. One of these protections derives from the newly enacted Dodd-Frank Act, whose Bureau of Consumer Financial Protection could play a leading role in policing fraudulent claims of corporate social responsibility.

We analytically compare two dominant methodologies for the construction of an ESG factor: the time-series (ratings used to sort stocks) and cross-sectional (ratings used to weight stocks) approaches. Differences in ESG rating and exposure to other firm characteristics imply an textit{ex ante} expected return spread between the two factors. We construct a cross-sectional factor (i) featuring a targeted rating, thus allowing comparability with other factors, (ii) neutralizing exposure to other firm characteristics, and (iii) not harming diversification through stock screening. Using ratings from several data vendors, we document strong variations of the factor alpha in the time series and across vendors. The conditional alpha is negatively related to the level of media attention for ESG and positively related to variations in media attention.

We document strong abnormal effects due to U.S. landfall hurricanes over the period 1990 to 2017 on stock returns and illiquidity across portfolios of stocks sorted by market equity (ME), book-to-market equity ratio (BE/ME), momentum, return-on-equity (ROE), and investment-to-assets (I/A). ROE- and I/A-related long/short factors are insensitive to hurricanes, while size-, BE/ME-, and momentum-related factors are extremely sensitive to these extreme weather events. Long and short legs react differently and high momentum stocks experience a negative impact on their returns an order of magnitude greater than other stocks. Abnormal illiquidity is only able to account for a small fraction of the observed abnormal returns.

International trade contributes directly to global greenhouse gas emissions, as the carbon content of high-emission products is priced differently in different countries. This phenomenon is termed carbon leakage. Thus, not putting a price on carbon is theoretically equivalent to an export subsidy, although that would be difficult to challenge in the context of multilateral trade law. Leakage can be alleviated by pricing the carbon embedded in imported products through a border carbon adjustment (BCA), be it a tax, a carbon tariff, or a regulation requiring the purchase of emissions allowances. The design of a BCA is a compromise between environmental effectiveness in preventing leakage, economic effectiveness in preserving competitiveness and ensuring acceptability, technical feasibility of the implementation, and World Trade Organization compatibility. An import-limited BCA is more effective than free emissions allowances in reducing leakage, but it does not preserve the export competitiveness of the country imposing it.

Can a self-proclaimed Socially Responsible Fund (SRF) whose objective is to maximize assets under management improve social welfare? We study this question in a general equilibrium two-sector model incorporating financial intermediation, negative externalities due to firms’ emissions, and investors’ social preferences, which are of two kinds: (a) private benefits from investing in low-emission footprint equities (“value alignment”), and (b) utility from causing improvement in social welfare (“impact”). We analyze the equilibrium size and strategies of the SRF. When investors with value-alignment preferences are in large proportion in the population we show that the SRF invests in the low-emission sector, while requiring invested companies to use low-emission suppliers. This “Scope 3 strategy” attracts both types of investors and indirectly induces lower emissions by acting on the supply-chain. In some other scenarios, the SRF adopts a dual-fund strategy that separates the two types of investors: One fund, focussed on the clean sector, caters to investors with value-alignment preferences, while another, which invests in the higher-emission sector, appeals to impact investors by imposing reduced direct emissions to invested companies.

Geophysicists examine and document the repercussions for the earth’s climate induced by alternative emission scenarios and model specifications. Using simplified approximations, they produce tractable characterizations of the associated uncertainty. Meanwhile, economists write highly stylized damage functions to speculate about how climate change alters macroeconomic and growth opportunities. How can we assess both climate and emissions impacts, as well as uncertainty in the broadest sense, in social decision-making? We provide a framework for answering this question by embracing recent decision theory and tools from asset pricing, and we apply this structure with its interacting components in a revealing quantitative illustration.

Do firms benefit from their voluntary efforts to alleviate the many problems confronting society? A vast literature establishing a “business case” for corporate social responsibility appears to find that usually they do. However, as argued herein, the business case literature has established only that firms usually benefit from responding to the demands of their primary stakeholders. The nature of the relationship between the interests of business and those of broader society, beyond a subset of powerful primary stakeholders, remains an open question despite this vast literature. This article develops a set of propositions that highlight constraints on firms’ ability to profit from corporate social responsibility and outlines a set of managerial challenges on which researchers must focus their attention in order to truly determine whether and when firms can profit by responding to the needs of society.

Are CSR initiatives providing the societal good that they promise? After decades of CSR studies, we do not have an answer. In this review, we analyze progression of the CSR literature toward assessing the performance of CSR initiatives, identify factors that have limited the literature’s progress, and suggest a new approach to the study of CSR that can overcome these limits. We begin with comprehensive bibliometric mapping illustrating that although social impact has infrequently been its explicit focus, the CSR literature has measured outcomes other than firm performance, especially in the current decade. Thereafter, we conduct a more fine-grained analysis of recent CSR studies. Adapting a logic model framework, we show that even the most highly cited studies have stopped short of assessing social impact, often measuring CSR activities rather than impacts, and focusing on benefits to specific stakeholders rather than to wider society. In combination, our analyses suggest that assessment of the performance of CSR initiatives has been driven by the availability of large, public secondary data sources. However, creating more such databases and turning to “big data” analyses are inadequate solutions. Drawing from the impact evaluation literature of development economics, we argue that the CSR field should reconceive itself as a science of design in which researchers formulate CSR initiatives that seek to achieve specific social and environmental objectives. In accordance with this pursuit, CSR researchers should move toward “small data” research designs, which will enable studies to better determine causation, rather than just identify correlation.

We show that lenders charge higher interest rates for mortgages on properties exposed to a greater risk of sea level rise (SLR). This SLR premium is not evident in short-term loans and is not related to borrowers’ short-term realized default or creditworthiness. Further, the SLR premium is smaller when the consequences of climate change are less salient and in areas with more climate change deniers. Overall, our results suggest that mortgage lenders view the risk of SLR as a long term risk, and that attention and beliefs are potential barriers through which SLR risk is priced in residential mortgage markets.

This paper seeks to answer the question of how banking regulation can contribute to environmental sustainability objectives. The 2030 United Nations Sustainable Development Goals and 2015 Paris Climate Change Treaty place climate action and environmental challenges as central to the required transformation of the global economy. The G20 and the Financial Stability Board (FSB) have expressed concerns that climate change represents a major threat to the future stability of the global economy. Many studies have demonstrated the links between environmental sustainability challenges and economic and financial risks. As banks are the largest providers of credit in many economies, how they manage these risks collectively is an important policy and regulatory concern. This paper discusses how prudential banking regulation and supervision can help to direct, incentivize and encourage banks to support sustainability. In doing so, it reviews some of the main regulatory standards and supervisory approaches that are emerging from best practice to address environmental sustainability challenges. The paper considers some recent international and regional initiatives which address how financial regulation and environmental, social and governance (ESG) factors can be incorporated into financial regulatory and policy frameworks. The paper argues that international regulation should play a larger role in developing harmonized standards for bank risk governance and business model assessment because where sustainability risks are material financial risks for individual banks they can create systemic risks to the banking sector as a whole. Finally, the paper considers some common challenges in developing more effective regulatory approaches for supervising banks in the context of managing the financial risks posed by environmental sustainability.

ESG is both extremely important and nothing special. It’s extremely important because it’s critical to long-term value, and so any practitioner or academic should take it seriously, not just those with “ESG” in their job title or list of research interests. Thus, ESG doesn’t need a specialized term, as that implies it’s niche. Considering long-term factors when valuing a company isn’t ESG investing; it’s investing. It’s nothing special since it’s no better or worse than other intangible assets that drive long-term value and create positive externalities for wider society, such as management quality, corporate culture, and innovative capability. The following implications follow:, 1. Companies shouldn’t be praised more for improving their ESG performance than these other intangibles; investor engagement on ESG factors shouldn’t be put on a pedestal compared to engagement on other value drivers. We want great companies, not just companies that are great at ESG. 2. Investors who greenwash are correctly being held to account. But so should other investors who fail to walk the talk, such as actively-managed funds that closet index or systematically underperform. Clients of non-ESG funds deserve the same protection as clients of ESG funds. 3. Practitioners shouldn’t rush to do something special for ESG factors that they wouldn’t for other drivers of value, such as demand that every company tie executive pay to them, force a firm to report them even if not relevant for its particular business, or reduce complex intangibles to simple quantitative metrics. 4. Many of the controversies surrounding ESG become moot when we view it as a set of long-term value factors. It’s no surprise that ESG ratings aren’t perfectly correlated, because it’s legitimate to have different views on the quality of a company’s intangibles. We don’t need to get into angry fights between ESG believers and deniers, nor politicize the issues, because reasonable people can disagree on how relevant a characteristic is for a company’s long-term success.

Studying 30 countries, we find that the link between employee satisfaction and stock returns is significantly increasing in a country’s labor market flexibility. This result is consistent with employee satisfaction having greater recruitment, retention, and motivation benefits where firms face fewer hiring and firing constraints and employees have greater ability to respond to satisfaction. Labor market flexibility also increases the link between employee satisfaction and current valuation ratios, future profitability, and future earnings surprises, inconsistent with omitted risk factors and identifying channels through which employee satisfaction may affect stock returns. The findings have implications for the differential profitability of socially responsible investing strategies around the world – in particular, the importance of considering institutional factors when forming such strategies.

This article is the first chapter of a book authored by R. Kraakman, P. Davies, H. Hansmann, G. Hertig, K. Hopt, H. Kanda, and E. Rock, “The Anatomy of Corporate Law: A Comparative and Functional Approach,” (Oxford University Press 2004). The book as a whole provides a functional analysis of corporate (or company) law in Europe, the U.S., and Japan. Its organization reflects the structure of corporate law across all jurisdictions, while individual chapters explore the diversity of jurisdictional approaches to the common problems of corporate law. As the introductory chapter to the book, this paper introduces the book’s analytic framework, which focuses on the common structure of corporate law across different jurisdictions as a response to fundamentally similar legal and economic problems. It first details the economic importance of the corporate form’s hallmark features: legal personality, limited liability, transferable shares, delegated management, and investor ownership. The major agency problems that attend the corporate form and that, therefore, must be addressed, are identified. The chapter next considers the role of law and contract in structuring corporate affairs, including the function of mandatory and default rules, standard forms, and choice of law, as well the debate about the proper role of corporate law in promoting overall social welfare. While almost all legal systems retain the core features of the corporate form, individual jurisdictions have made distinct choices regarding many other aspects of their corporate laws. The forces shaping the development of corporate law, including evolving patterns of share ownership, are examined. In addition to Chapter 1, Chapter 2 of the Anatomy of Corporate Law, “Agency Problems and Legal Strategies” is available (full text) on the SSRN. The abstracts for Chapter 3: The Basic Governance Structure; Chapter 4: Creditor protection (http://ssrn.com/abstract=568823); Chapter 5: Related Party Transactions; Chapter 6: Significant Corporate Actions; Chapter 7: Control Transactions; Chapter 8: Issuers and Investor Protection; Chapter 9: Beyond the Anatomy are also/will be available on the SSRN.

In this paper, we examine the yield premium of green bonds. We use a matching method, followed by a two-step regression procedure, to estimate the yield differential between a green bond and an otherwise identical synthetic conventional bond from July 2013 to December 2017. The results suggest a small negative premium: the yield of a green bond is lower than that of a conventional bond. On average, the premium is -2 basis points for the entire sample as well as for EUR and USD bonds separately. We show that the main determinants of the premium are the rating and the issuer type: the negative premia are more pronounced for financial and low-rated bonds.

We estimate financial institutions’ portfolio tilts related to stocks’ environmental, social, and governance (ESG) characteristics. From 2012 to 2023, ESG-related tilts consistently total about 6% of the investment industry’s assets and rise from 17% to 27% of institutions’ total portfolio tilts. Significant ESG tilts arise from the choice of stocks held and, especially, the weights on stocks held. The largest institutions tilt increasingly toward green stocks, while other institutions and households tilt increasingly brown. Divestment from brown stocks is typically partial rather than full, even for individual mutual funds. UNPRI signatories and European institutions tilt greener; banks tilt browner.

This article asks how sustainable investing (SI) contributes to societal goals, conducting a literature review on investor impact—that is, the change investors trigger in companies’ environmental and social impact. We distinguish three impact mechanisms: shareholder engagement, capital allocation, and indirect impacts, concluding that the impact of shareholder engagement is well supported in the literature, the impact of capital allocation only partially, and indirect impacts lack empirical support. Our results suggest that investors who seek impact should pursue shareholder engagement throughout their portfolio, allocate capital to sustainable companies whose growth is limited by external financing conditions, and screen out companies based on the absence of specific ESG practices that can be adopted at reasonable costs. For rating agencies, we outline steps to develop investor impact metrics. For policymakers, we highlight that SI helps to diffuse good business practices, but is unlikely to drive a deeper transformation without additional policy measures.

A fundamental concern about green investing is that it may crowd out political support for public policy addressing negative externalities. We examine this concern in a preregistered experiment shortly before a real referendum on a climate law with a representative sample of the Swiss population (N = 2,051). We find that the opportunity to invest in a climate friendly fund does not reduce individuals’ support for climate regulation, measured as political donations and voting intentions. The results hold for participants who actively choose green investing. We conclude that the effect of green investing on political behavior is limited.

This paper introduces the concept of sustainable finance literacy, which refers to retail investors’ knowledge of regulations, norms, and standards for financial products with sustainable characteristics. We survey a large sample of Swiss households and measure different literacy concepts using two complementary approaches. First, we use traditional multiple-choice questions, and second, a novel approach based on open-ended questions that ask respondents to write a text response. We find that Swiss households, which typically show high financial literacy by international standards, exhibit a low level of sustainable finance literacy. Interestingly, multiple-choice questions lead to a gender gap, with women performing worse than men. However, this difference disappears when open-ended questions are used. Moreover, despite its low level, sustainable finance literacy is a highly significant factor for sustainable product ownership. Therefore, our results reveal an urgent need to establish transparent regulatory standards and strengthen information campaigns on sustainable financial products.

Corporate social responsibility is often framed in terms of opposing constructions of the firm. These reflect, respectively, different accounts of its obligations: either to shareholders or to stakeholders (who include shareholders). Although these opposing constructions of corporate responsibility are diametrically opposed, they are also much more fluid and mobile in certain contexts, since they can act as discursive resources that are deployed and brought into play in the struggle over shaping what responsibility means. They are less the fixed, ideological “signposts” they might appear, and more like “weathervanes” that move alongside changing rhetorical currents. To show this, we analyse the Securities and Exchange Commission consultation process, and legislation, relating to the provenance of “conflict minerals”. We identify two dialectically opposed camps, each seeking to influence final legislation and with end goals in keeping with the shareholder/stakeholder dichotomy. One camp lobbied for firms to scrutinize their entire supply chain, constructing the firm as a “global citizen” with very wide social responsibilities. The second camp lobbied for a lighter touch approach, constructing the firm as a “trader”, with much narrower social responsibilities. We analyse the complex interplay between these two opposed camps, our contribution being to show how both deploy competing conceptions of the corporation as discursive resources.

Existing measures of ESG (environmental, social, and governance) performance — ESG ratings — are noisy and, therefore, standard regression estimates of the effect of ESG performance on stock returns are biased. Addressing this as a classical errors-in-variables problem, we develop a noise-correction procedure in which we instrument ESG ratings with ratings of other ESG rating agencies. With this procedure, the median increase in the regression coefficients is a factor of 2.1. The results are similar when we use accounting profitability measures as outcome variables. In simulations, our noise-correction procedure outperforms alternative approaches such as simple averages or principal component analysis.

We explore the effect of the interplay between a firm’s external and internal actions on performance in the context of corporate social responsibility (CSR). Drawing from the neo-institutional theory, we argue that external and internal CSR actions jointly contribute to the accumulation of intangible firm resources and therefore are associated with better performance. Importantly, though, we theorize that a wider gap between external and internal actions — reflecting a disconnect between “talk” and “action” by firms — negatively affects performance. Empirically, we use the market-value equation and a sample comprising 1,971 firms in 33 countries from 2002 to 2008. We find support for our hypotheses in the main analyses and robustness tests addressing potential endogeneity. We discuss implications for future research and practice.

A key aspect of the governance process inside organizations and markets is the measurement and disclosure of important metrics and information. In this chapter, we examine the effect of sustainability disclosure regulations on firms’ disclosure practices and valuations. Specifically, we explore the implications of regulations mandating the disclosure of environmental, social, and governance (ESG) information in China, Denmark, Malaysia, and South Africa using differences-in-differences estimation with propensity score matched samples. We find that relative to propensity score matched control firms, treated firms significantly increased disclosure following the regulations. We also find increased likelihood by treated firms of voluntarily receiving assurance to enhance disclosure credibility and increased likelihood of voluntarily adopting reporting guidelines that enhance disclosure comparability. These results suggest that even in the absence of a regulation that mandates the adoption of assurance or specific guidelines, firms seek the qualitative properties of comparability and credibility. Instrumental variables analysis suggests that increases in sustainability disclosure driven by the regulation are associated with increases in firm valuations, as reflected in Tobin’s Q. Collectively, the evidence suggest that current efforts to increase transparency around organizations’ impact on society are effective at improving disclosure quantity and quality as well as corporate value.

Setting targets and providing monetary incentives are two widely used motivating tools to achieve desirable organizational outcomes. We focus on reduction of carbon emissions as a setting in which to examine how target difficulty and monetary incentives provided to managers affect the degree of target completion. We use a novel dataset compiled by the Carbon Disclosure Project (CDP) that yields a sample of 1,127 firms from around the world. We find that firms setting more difficult targets or providing monetary incentives are able to complete a higher percentage of the target. The effect of target difficulty on target completion is nonlinear: above a certain level, stretching the target decreases the percentage of target completion. Moreover, we find that bundling difficult targets together with monetary incentives negatively affects the degree of target completion, suggesting that these two motivating tools act as substitutes in our setting. Finally, we provide evidence that both target difficulty and monetary incentives motivate managers to a) undertake more carbon reducing projects that generate more carbon savings, and b) invest more money in such projects, without increasing the average payback period of the project portfolio.

We develop a conceptual understanding of when and how organizations respond to normative pressures. More precisely, we examine two main factors underlying the willingness and ability of organizations to respond to an issue: (1) issue salience, and (2) the cost-benefit analysis of resource mobilization. We suggest that decision-makers’ interpretation of issue salience in conjunction with their perception of the costs and benefits of taking action to address the issue generates five potential responses: symbolic compliance and symbolic conformity, substantive compliance and substantive conformity, and inaction. We extend the baseline model by examining a number of boundary conditions. By focusing on the willingness and ability of organizations to respond to normative pressures, and by adopting the issue as the unit of analysis, our model helps explain intra- as well as inter-organizational response heterogeneity to institutional complexity. We contribute to the institutional research tradition and offer useful implications for managerial practice, from strategic management to policy making.

This study investigates how companies adjusted their investments in key strategic resources — i.e., their workforce, capital expenditures, R&D, and CSR — in response to the sharp increase in the cost of credit (the “credit crunch”) during the financial crisis of 2007-2009. We compare companies whose long-term debt matured shortly before versus after the credit crunch to obtain (quasi-)random variation in the extent to which companies were hit by the higher borrowing costs. We find that companies that were adversely affected followed a “two-pronged” approach of curtailing their workforce and capital expenditures, while maintaining their investments in R&D and CSR. We further document that firms that followed this two-pronged approach performed better post-crisis.

Given the growing legitimacy of corporate social responsibility (CSR), many firms engage in symbolic communication to showcase CSR without undertaking commensurate substantive actions. This “CSR decoupling” can create a risk of perceived greenwashing, which, in turn, may negatively affect a firm’s performance. In this study, we explore an unexamined antecedent of decoupling: interfirm affiliation. Specifically, we use the structure of Business Groups (BGs) to investigate CSR decoupling across rather than within firms. We find that apex firms within a group are more likely to engage in CSR decoupling compared with non-apex firms and, importantly, are partially shielded from greenwashing perceptions by the market. Our research contributes to the literatures on decoupling, perceived greenwashing, and the role of BGs and their CSR practices.

Based on Whitley’s “National Business Systems” (NBS) institutional framework (Whitley 1997; 1999), we theorize about and empirically investigate the impact of nation-level institutions on firms’ corporate social performance (CSP). Using a sample of firms from 42 countries spanning seven years, we construct an annual composite CSP index for each firm based on social and environmental metrics. We find that the political system, followed by the labor and education system, and the cultural system are the most important NBS categories of institutions that impact CSP. Interestingly, the financial system appears to have a relatively less significant impact. We discuss implications for research, practice and policy-making.

We investigate the impact of perceived greenwashing on customer satisfaction. Unlike prior research that largely examines customer perceptions associated with irresponsible behavior, we focus on cases where firms overcommit and/or do not deliver on promised socially responsible actions. We theorize that this type of greenwashing is associated with lower customer satisfaction because customers perceive greenwashing through the lens of corporate hypocrisy. Using data from the American Customer Satisfaction Index (ACSI) for U.S. companies during the period 2008–2016, we document a negative link between perceived greenwashing related to green product innovation (GPI) and the ACSI index. We demonstrate that this effect is primarily triggered by corporate policies exceeding the corresponding implementation actions and not by lower levels of implementation. We also show that a firm’s capability reputation mitigates the negative effect of greenwashing on customer satisfaction. Moreover, we conduct an experiment and provide evidence confirming that GPI greenwashing is in fact perceived by customers as corporate hypocrisy.

Using newly-available materiality classifications of sustainability topics, we develop a novel dataset by hand-mapping sustainability investments classified as material for each industry into firm-specific sustainability ratings. This allows us to present new evidence on the value implications of sustainability investments. Using both calendar-time portfolio stock return regressions and firm-level panel regressions we find that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings on these issues. In contrast, firms with good ratings on immaterial sustainability issues do not significantly outperform firms with poor ratings on the same issues. These results are confirmed when we analyze future changes in accounting performance. The results have implications for asset managers who have committed to the integration of sustainability factors in their capital allocation decisions.

Despite the rising use of environmental, social, and governance (ESG) ratings, there is substantial disagreement across rating agencies regarding what rating to give to individual firms. As what drives this disagreement is unclear, we examine whether a firm’s ESG disclosure helps explain some of this disagreement. We predict and find that greater ESG disclosure actually leads to greater ESG rating disagreement. These findings hold using firm fixed effects, and using a difference-in-differences design with mandatory ESG disclosure shocks. We also find that raters disagree more about ESG outcome metrics than input metrics (policies), and that disclosure appears to amplify disagreement more for outcomes. Lastly, we examine consequences of ESG disagreement and find that greater ESG disagreement is associated with higher return volatility, larger absolute price movements, and a lower likelihood of issuing external financing. Overall, our findings highlight that ESG disclosure generally exacerbates ESG rating disagreement rather than resolving it.

We investigate whether ESG ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. Relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens while the rating with most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.

ESG is one of the most notable trends in corporate governance, management, and investment of the past two decades. It is at the center of the largest and most contentious debates in contemporary corporate and securities law. Yet few observers know where the term comes from, who coined it, and what it was originally aimed to mean and achieve. As trillions of dollars have flowed into ESG-labeled investment products, and companies and regulators have grappled with ESG policies, a variety of usages of the term have developed that range from seemingly neutral concepts of integrating “environmental, social, and governance” issues into investment analysis to value-laden notions of corporate social responsibility or preferences for what some have characterized as “conscious” or “woke” capitalism. This Article makes three contributions. First, it provides a history of the term ESG that was coined without precise definition in a collaboration between the United Nations and major players in the financial industry to pursue wide-ranging goals. Second, it identifies and examines the main usages of the term ESG that have developed since its origins. Third, it offers an analytical critique of the term ESG and its consequences. It argues that the combination of E, S, and G into one term has provided a highly flexible moniker that can vary widely by context, evolve over time, and collectively appeal to a broad range of investors and stakeholders. These features both help to account for its success, but also its challenges such as the difficulty of empirically showing a causal relationship between ESG and financial performance, a proliferation of ratings that can seem at odds with understood purposes of the term ESG or enable “sustainability arbitrage,” and tradeoffs between issues such as carbon emissions and labor interests that cannot be reconciled on their own terms. These challenges give fodder to critics who assert that ESG engenders confusion, unrealistic expectations, and greenwashing that could inhibit corporate accountability or crowd out other solutions to pressing environmental and social issues. These critiques are not necessarily fatal, but are intertwined with the characteristic flexibility and unfixed definition of ESG that was present from the beginning, and ultimately shed light on obstacles for the future of the ESG movement and regulatory reform.

As part of the Securities and Exchange Commission’s revision of Regulation S-K, which lays out reporting requirements for publicly listed companies, many investors proposed the mandatory disclosure of sustainability information in the form of environmental, social and governance (ESG) data. However, progress is contingent on collecting evidence regarding which sustainability disclosures are financially material. To inform this issue, we examine materiality standards developed by the Sustainability Accounting Standards Board (SASB). Firms voluntarily disclosing more SASB-identified sustainability information exhibit greater price informativeness, while the disclosure of non-SASB information does not relate to informativeness. The results are robust to a changes analysis and a difference-in-differences analysis that exploits the staggered release of SASB standards across different industries over time. We also document stronger results for firms with higher exposure to sustainability issues, poorer sustainability ratings, greater institutional and socially responsible investment fund ownership, and coverage from analysts with lower portfolio complexity.

We use Transparency International’s ratings of self-reported anticorruption efforts for 480 corporations to analyze factors underlying the ratings. Our tests examine whether these forms of disclosure reflect firms’ real efforts to combat corruption or are cheap talk. We find that firms with high ratings are domiciled in countries with low corruption ratings and strong anticorruption enforcement, operate in high corruption risk industries, have recently faced a corruption enforcement action, employ a Big Four audit firm, and have a higher percentage of independent directors. Controlling for these effects and other determinants, we find that firms with lower residual ratings have relatively higher subsequent media allegations of corruption. They also report higher future sales growth and show a negative relation between profitability change and sales growth in high corruption geographic segments. The net effect on valuation from sales growth and changes in profitability is close to zero. Given this evidence, we conclude that, on average, firms’ self-reported anticorruption efforts signal real efforts to combat corruption and are not merely cheap talk.

We propose a novel way of measuring the equity portfolio-level environmental and social characteristics of a 13F institution (the “sustainability footprint”) and examine the relation between sustainability footprints and risk-adjusted investment performance. The analysis shows that 13F institutions with better sustainability footprints outperform. The positive effect of sustainability footprints on the risk-adjusted performance of 13F institutions’ equity portfolios is concentrated in the environmental dimension and in more recent periods. Further tests show that the outperformance is explained by growing investor preferences for sustainable investing over time and the resulting price pressure that institutions exert on stocks with good environmental scores.

We study whether institutional investors that sign the Principles for Responsible Investment (PRI), a commitment to responsible investing, exhibit better portfolio-level environmental, social, and governance (ESG) scores. Signatories outside the US have superior ESG scores than non-signatories, but US signatories have at best similar ESG ratings, and worse scores if they have underperformed recently, are retail-client facing, and joined the PRI late. US signatories do not improve the ESG scores of portfolio companies after investing in them. Commercial motives, uncertainty about fiduciary duties, and lower ESG market maturity explain why US-domiciled PRI signatories do not follow through on their responsible investment commitments.

Corporate Social Responsibility (CSR) refers to the incorporation of Environmental, Social, and Governance (ESG) considerations into corporate management, financial decision making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities (e.g. pollution) they create, and are willing to be accountable to shareholders as well as a broader group of stakeholders (employees, customers, suppliers, local communities,…). Over the past two decades, various rating agencies developed firm-level measures of ESG performance, which are widely used in the literature. A problem for past and a challenge for future research is that these ratings show inconsistencies, which depend on the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing (SRI). The return implications of investing in the stocks of socially responsible firms, the search for an EGS factor, as well as the performance of SRI funds are the dominant topics. SR funds apply negative screening (exclusion of ‘sin’ industries), positive screening, as well as activism through proxy voting or direct engagement. In this context, one wonders whether responsible investors are willing to trade off financial returns with a ‘moral’ dividend (the return given up in exchange for an increase in utility driven by the knowledge that one invests ethically). A recent literature concentrates on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic de-carbonization as climate change affects financial markets and investor behavior.

We provide a survey of the micro and macroeconomics of climate change from a complexity science perspective and we discuss the challenges ahead for this line of research. We identify four areas of the literature where complex system models have already produced valuable insights: (i) coalition formation and climate negotiations, (ii) macroeconomic impacts of climate-related events, (iii) energy markets and (iv) diffusion of climate-friendly technologies. On each of these issues, accounting for heterogeneity, interactions and disequilibrium dynamics provides a complementary and novel perspective to one of standard equilibrium models. Furthermore, it highlights the potential economic benefits of mitigation and adaptation policies and the risk of under-estimating systemic climate change-related risks.

Canada ranks highly among the developed countries that have provided government support to the fossil fuel sector, but this situation is changing. To address the climate emergency, Canada has legally committed to achieving net-zero carbon dioxide (CO2) and other greenhouse gas (GHG) emissions by 2050. How our federal, provincial, and territorial governments spend public dollars to meet this net-zero target is critically important as Canada finances its recovery from the COVID-19 pandemic. This report serves as a source of information to guide Canadian policymakers, business leaders, pension fiduciaries, and civil society members in their efforts to align fossil fuel subsidies with the country’s net-zero policy targets. It includes recent information on our government’s international policy commitments at the United Nations sponsored Twenty-Sixth Conference of the Parties (COP 26) that held from October to November 2021, federal ministerial mandates in December 2021 and other national responses as of February 2022 and forecasts other implications in Canada. The author finds that Canada has federal, provincial, and territorial subsidies, but governments do not report enough data. However, based on recent data from governments and the International Institute for Sustainable Development (IISD), the leading research organization analysing data on fossil fuel subsidies in Canada, there is a conservative estimate: the combined federal, provincial, and territorial fossil fuel subsidies in Canada total at least $4.8 billion annually in 2018 and 2019, and most were given by provincial and territorial governments. Federal subsidies tend to take the form of grants, but provincial and territorial subsidies are often from tax programs such as waivers and breaks as well as uncollected or under-collected resource rents or royalties. From the available data, we see some patterns of fossil fuel subsidies in Canada. The federal government gives more subsidies to producers than consumers to incentivize the extraction of fossil fuels and/or reduce their emissions, and some subsidies have recently shifted focus from exploration to infrastructure development for production and export of Canadian fuels abroad. Subsidies that reduce emissions make oil, gas, coal, and fossil fuel products less GHG intensive and/or expand natural gas production to reduce the reliance on oil. Many provincial and territorial governments give consumption subsidies, although provinces such as Alberta and British Columbia have significant production subsidies as well. Consumption subsidies include tax exemptions for the use of fossil fuels such as gasoline, coal, natural gas, diesel, and propane. Given Canada’s race to net-zero, these federal, provincial, and territorial subsidies now have more negative than positive implications for Canadian society. The report classifies and discusses four governance implications: government transparency, climate policy effectiveness, climate justice, and risk exposure. While government transparency and some aspects of climate policy effectiveness and climate justice are better known, the risk exposure of companies, investments and fiduciaries have hardly been acknowledged. The report contributes on these four implications. First, Canadian governments across levels do not report fossil fuel subsidies transparently to enable companies, financial institutions, and Canadian civil society members to adequately evaluate the costs and benefits. We do not fully understand how governments spend public dollars in subsidies. Second, some fossil fuel subsidies cause more global warming and climate change, while others aim to reduce GHG emissions by promoting the use of low-carbon technologies such as renewable energy, energy efficiency and, controversially, carbon capture and storage. Fossil fuel subsidies therefore have two major implications for climate policy: the impact on GHG emissions reduction and on the finance of low-carbon technologies. How fast and well Canada transitions is at stake. Third, fossil fuel subsidies disproportionately impact societal stakeholders that are most vulnerable to policies, corporate actions, and investment decisions in the fossil fuel industry. Canadian society, especially low-income people and communities who bear the consequences of the social externalities of subsidies, workers and communities relying on the fossil fuel economy, and Indigenous Peoples and communities suffering the consequences of oil extraction, are impacted. Fourth, businesses, investments and governments are increasingly exposed to risks in the race to net-zero. Government of Canada has signed the COP 26 Statement on International Public Support for the Clean Energy Transition and the Glasgow Climate Pact. In doing so, Canada commits to ending new direct public support for the international unabated fossil fuel energy sector by the end of 2022 and diverting funding to clean energy and phasing out some fossil fuel subsidies by 2023. Canadian developments to implement these latest policy commitments increase corporate and investment risk exposure, and governments can expect more litigation checking their policies and other actions. Given these far-reaching implications, the report offers extensive recommendations to support Canada’s fossil fuel subsidy reforms. Because governments have the most important role to play in reforming subsidies, most of the ideas seek to help them enhance information, promote policy targets, enable stakeholder evaluation, address vulnerabilities, and limit exposure to litigation risks. Governments at both federal and provincial/territorial levels should: adopt the Auditor General of Canada’s definition of subsidy for government direct and indirect support given to the fossil fuel industry, in line with international best practice; prepare and release detailed periodic inventories of subsidies, identifying those that are inefficient; provide information on subsidies supporting net-zero GHG emissions; report annually on risk management measures; review and revise tax, royalty and other legislation and policies relating to fossil fuel subsidies; and frame energy subsidies, including renewables and other sources to benefit from a shift from fossil fuel to alternative sustainable energy subsidies, with the concept of climate justice. The fossil fuel subsidy phase-out should specifically include collaboration at all levels of government to protect workers and communities dependent on the oil and gas sector by developing a pan-Canadian just transition program that retrains fossil fuel workers, integrates fossil fuel-dependent communities into new low-carbon economic activity, and partners with Indigenous Peoples in the transition to net-zero. These recommendations for governments can guide business involvement in Canadian policy, but the report also offers ideas for corporate and investment fiduciaries to mitigate their subsidy risk exposure in Canada’s transition. Corporate and investment fiduciaries should deliberate on the risks of fossil fuel subsidies and opportunities related to low-carbon transition through engagement, planning, disclosure processes, and risk management. Additionally, the report makes recommendations for civil society members, acknowledging how their actions could impact business, investment, and fiduciaries. Indigenous Peoples, fossil fuel workers, and other vulnerable groups have the immediate opportunity to question fossil fuel subsidies through engagement with governments and pension funds, climate litigation and, in the medium term, by orchestrating actions that support the phasing out of fossil fuel subsidies.

Existing approaches to assess the economic impact of climate policies tend to overlook the financial sector and to focus only on direct effects of policies on the specific institutional sector they target, neglecting possible feedbacks between sectors, thus, underestimating the overall policy effect. To fill in this gap, we develop a methodology based on financial networks, which allows for analyzing the transmission throughout the economy of positive or negative shocks induced by the introduction of specific climate policies. We apply the methodology to empirical data of the Euro Area to identify the feedback loops between the financial sector and the real economy both through direct and indirect chains of financial exposures across multiple financial instruments. By focusing on climate policy-induced shocks that affect directly either the banking sector or non-financial firms, we analyze the reinforcing feedback loops that could amplify the effects of shocks on the financial sector and then cascade on the real economy. Our analysis helps to understand the conditions for virtuous or vicious cycles to arise in the climate-finance nexus and to provide a comprehensive assessment of the economic impact of climate policies.

We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks’ loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks’ external assets are reflected in a consistent way in the market value of banks’ mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union.

Having reflected on the history of the interpretation of the European Central Bank’s mandate, and discussed the international developments concerning climate change on central banking and financial-sector supervision (NGFS, TCFD, BIS), this chapter concludes as follows. The ECB’s primary mandate of maintaining price stability is predominant, in the core provisions (Articles 127(2) and 119(3) TFEU) and in the rules on exchange-rate policy (Article 219(1) and (2)TFEU). The ECB’s secondary mandate (to support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Article 127(2) TFEU) clearly supports an interpretation of its remit which takes climate change, and biodiversity loss, fully into account since the economic policies in the EU and the EU’s Climate Law make the direction of the Union’s policymakers crystal clear. Similarly, the Union’s objectives (Article 3 TEU) explicitly include climate-change related objectives: sustainable development, balanced economic growth, a high level of protection and improvement of the quality of the environment, solidarity between generations and protection of the rights of the child, the protection of human rights, in particular the rights of the child, protection of the Union’s citizens, and the sustainable development of the Earth. Beyond these strong arguments to read the mandate as not only permitting but requiring the ECB to take full account of climate change and biodiversity loss, additional arguments can be derived from the integration provisions (Articles 11 and 7 TFEU) and from the binding nature of the Paris Agreement (Article 216(2) TFEU). The EU’s Charter of Fundamental Rights provides an additional legal argument (Article 37) for my preferred reading of the ECB’s mandate. Whereas these legal arguments suffice, recourse to the primary mandate alone would be sufficient since the ever clearer consequences of climate change for price stability, and for financial stability, lead me – together with others – to conclude that there is a legal requirement to fully integrate climate change and biodiversity loss in the monetary policy operations of the ECB, not: a mere authorisation to do so. The open-market principle (Articles 127(1) and 119(2) TFEU) does not form an obstacle to this reading. On the contrary, it requires the ECB to support well-functioning markets which the current price setting of financial and other products are far from. There is no ‘market neutrality principle’ under EU law (even though central banks may have acted in accordance with this rule). An emergency situation reading of the mandate, and a focus on the relationship between climate stability and primate stability may further buttress this interpretation. This reading may have consequences for a variety of operations of the ECB, from investing its own funds in green assets to re-assessing and re-directing asset purchasing programmes for climate impact and requiring proof of ‘green-ness’ for collateral. All this presupposes the existence of a robust green taxonomy, which the EU has adopted and is fast developing, hick-ups in the realisation and diverse policy stances, notably on nuclear and gas, notwithstanding. Other elements of change may include taking a longer-term perspective in the price-stability objective and incorporating climate and biodiversity variables in research, analysis and policy-making. The results of the ECB’s monetary policy strategy review and an overview of the actions already undertaken before and since show that the Euro Area’s central banking system has firmly taken the road towards climate resilience and incorporation of climate change into its activities. There is scope for widening the climate considerations into other elements of monetary policy. The ECB’s activities include prudential supervision where the same legal grounds as applied to monetary policy apply. However, in this area, the legislative norms play a dominant role. Due to their – thus far – very limited integration of climate change and biodiversity loss into banking laws, the ECB will have to rely on the risk element inherent in any prudential standards to include climate change into its supervisory activities. It has done so already, inter alia with the adoption of its Guide on climate-related and environmental risks and the implementation of a wide-ranging climate change stress test. As to other ECB tasks, the promotion of the smooth operation of payment systems and the issue of bank notes seem most relevant from the perspective of climate change. The oversight of payments systems, and the possible introduction of a Central Bank Digital Currency, both provide opportunities to include environmental soundness. It is concluded, on the basis of the same arguments as prevail in the context of monetary policy, that the ECB is legally bound to do so. It is too early to provide an assessment of what has been undertaken thus far. As indicated, there is uncertainty about the exact scope of the taxonomy, also since the full-scale Russian invasion of Ukraine. And there are clear blank spots still in the ECB’s climate action: unconventional monetary policy instruments are only partially covered and ‘green TLTROs’ are hardly mentioned, while greening the foreign reserve portfolio of the Eurosystem seems not yet contemplated either. Yet, recently realised movements on climate change, as well as the conclusions of the monetary policy strategy review, the climate action plan and the matters undertaken during the first year of its implementation show a deep commitment and indicate a willingness to embrace the full rigour of the ECB’s legal obligation in respect of climate change and biodiversity loss.

The transition of a sector from a pollutant state to a clean one is studied. A green technology, subject to learning-by-doing, progressively replaces an old one. The notion of abatement cost in this dynamic context is fully characterized. The theoretical, dynamic optimization, perspective is linked to simple implementation rules. The practical “deployment” perspective allows to study sub-optimal trajectories. Moreover, the analysis of the launching date provides a definition of a dynamic abatement cost easy to use for evaluation of real-world policy options. The case of Fuel Cell Electric Vehicles offers an illustration of the proposed methodology.

Growing demand for ‘critical minerals’ – such as lithium, cobalt, and nickel – and strategic rivalries between large economies have prompted a scramble to secure control of such minerals and the supply chains that organise their processing and distribution. Public policies have sustained these processes, producing new types of international instruments – from standalone agreements, such as the Japan-US Critical Minerals Agreement; to tailored provisions in trade treaties, such as the ‘energy and raw materials’ chapter of the Chile-EU trade agreement; all the way to soft instruments that provide a shared framework and roadmap for cooperation, such as the strategic partnerships the EU has negotiated with several mineral-rich states. Through the prism of critical minerals supply chains, these instruments cut across different areas of law and policy: trade, investment, aid, labour rights, the environment and collaboration in research and innovation. Critical minerals have also featured in international dispute settlement processes, including a dispute at the World Trade Organization over Indonesia’s restrictions on unprocessed nickel ore exports. An initial appraisal of these developments highlights the role of law in sustaining and regulating commodity production and trading, while the widespread use of soft instruments points to the limits of legal processes in the context of rapidly evolving economic and geopolitical realities. The developments reflect both continuities and ruptures in international economic law, particularly in relation to the roles of states and markets. They also illustrate the interrelatedness of climate imperatives, territorial governance, and international investment and trade, and the need to more effectively integrate ecological sustainability and ‘just transition’ principles into the fabric of the global economic order.

We use strategic interactions to analyze the role of China’s state-subsidized production expansion in the recent downturn in solar photovoltaics innovation. To that end, we develop a dynamic game model in which N solar panel manufacturers compete in price and invest in cost-reducing research. The resulting Nash equilibrium reveals an inverted U relationship between a manufacturer’s market share and her research effort. In the duopoly case, with a local firm competing against a foreign state-subsidized one, we obtain analytical and numerical results that are consistent with a set of stylized facts, namely (i) the foreign manufacturer progressively expands to become the dominant player (ii) competition and innovation bring marginal costs down to zero (iii) each manufacturer’s research effort follows an increasing-then-decreasing curve. At a policy level, these theoretical results suggest that national technology-push policies can affect foreign innovation, by changing the structure of global competition.

We develop an algorithm that simulates by iterative splitting the hourly equilibrium (price-quantity) of the Italian day-ahead market. The algorithm is employed to study the sensitivity of equilibria to changes in production from renewable units at different locations. We show that, when power markets are organised on zonal-basis with locational price signals and final buyers pay a unique price for the power bought in the day-ahead market, a larger renewable production decreases the average zonal prices, but the distribution of benefits largely depends on power plants’ localisation. We analyse the impact of a larger renewable production on network congestion occurrence, zonal balance between demand and supply and zonal generation mix as well. We calculate the zonal substitution effects between renewable and non-renewable technologies, and within renewable technologies. Our analysis sheds some lights on the multiple consequences of energy transition policies and highlights the need of prioritizing over policies’ objectives.

We use firm-level data that measure forward-looking physical climate risk to examine the impact of climate risk on capital structure. We find that greater physical climate risk leads to lower leverage in the post-2015 period, i.e., after the Paris Agreement and the first step of standardization of disclosure of climate risk information. Our results hold after controlling for firm characteristics known to determine leverage, including credit ratings. Our evidence shows that the reduction in leverage related to climate risk is shared between a demand effect (the firm’s optimal leverage decreases) and a supply effect (bankers and bondholders increase spreads when lending to firms with the greatest risk). Our results are consistent with the hypothesis that physical climate risk affects leverage via larger expected distress costs and higher operating costs.

Plastic pollution is a matter of increasing global concern. Unmanaged plastic waste is a particularly large and growing problem in the world’s oceans. Assuming a constant level of fish stocks, the weight of plastic pollution in the ocean in 2050 is projected to exceed the weight of the fish. The concern reaches all levels of government from the local to the national. Solutions include plastic bag bans, taxes or fees on single-use plastics, incentives for reusable bags, and incentives for recycling. Recycling has become a particular issue since early 2018, when China announced it would stop accepting imported plastic waste. Plastics pollution creates significant environmental externalities, such as harm to natural systems, greenhouse gas emissions from production and after-use incineration, and human health impacts from endocrine disrupters released when plastics degrade. Environmental taxation should be an efficient solution to the plastics pollution problem, if properly designed. Research shows that taxation could be more effective than other measures such as incentives. This Article will assess the various solutions proposed and used worldwide.

This paper examines how physical climate risks affect firms’ financial performance and operational risk management in global supply-chains. We document that weather shocks at supplier locations reduce the operating performance of suppliers and their customers. Further, customers respond to perceived changes in suppliers’ climate-risk exposure: When realized shocks exceed ex-ante expectations, customers are 6-11% more likely to terminate existing supplier-relationships. Consistent with models of experience-based learning, this effect increases with signal strength and repetition, is insensitive to long-term climate projections, and increases with industry competitiveness and decreases with supply-chain integration. Customers subsequently choose replacement suppliers with lower expected climate-risk exposure.

Climate change poses new challenges for portfolio management. In our not-yet-low carbon world, investors face a trade-off between minimizing their exposure to climate risks and maximizing the benefits of portfolio diversification. This paper investigates how investors and financial intermediaries navigate this trade-off. After the release of Morningstar’s novel carbon risk metrics in April 2018, mutual funds labeled as “low carbon” experienced a significant increase in investor demand, especially those with high risk-adjusted returns. Fund managers actively reduced their exposure to firms with high carbon risk scores, especially stocks with returns that correlated more with the funds’ portfolios and were thus less useful for diversification. These findings shed light on whether and how climate-related information can re-orient capital flows in a low carbon direction.

The first Global Climate Strike on March 15, 2019, represented a historical turning point in climate activism. We investigate the cross-section of stock price reactions to this event for a large sample of European firms. The strike’s unanticipated success caused a decrease in the stock prices of carbon-intensive firms. The effect appears to be driven by the increased public attention to climate activism. Furthermore, after the first Global Climate Strike financial analysts downgraded their longer-term earnings forecasts on carbon-intensive firms.

These presentation slides have been written for the Advanced Course in Asset Management (theory and applications) given at the University of Paris-Saclay. They contain 5 lectures (Part 1. Portfolio Optimization Part 2. Risk Budgeting Part 3. Smart Beta, Factor Investing and Alternative Risk Premia Part 4. Green and Sustainable Finance, ESG Investing and Climate Risk Part 5. Machine Learning in Asset Management) and 15 tutorial exercises. The Table of contents is the following: Part 1. Portfolio Optimization 1. Theory of portfolio optimization 1.a. The Markowitz framework 1.b. Capital asset pricing model (CAPM) 1.c. Portfolio optimization in the presence of a benchmark 1.d. Black-Litterman model 2. Practice of portfolio optimization 2.a. Covariance matrix 2.b. Expected returns 2.c. Regularization of optimized portfolios 2.d. Adding constraints 3. Tutorial exercises 3.a. Variations on the efficient frontier 3.b. Beta coefficient 3.c. Black-Litterman model Part 2. Risk Budgeting 1. The ERC portfolio 1.a. Definition 1.b. Special cases 1.c. Properties 1.d. Numerical solution 2. Extensions to risk budgeting portfolios 2.a. Definition of RB portfolios 2.b. Properties of RB portfolios 2.c. Diversification measures 2.d. Using risk factors instead of assets 3. Risk budgeting, risk premia and the risk parity strategy 3.a. Diversified funds 3.b. Risk premium 3.c. Risk parity strategies 3.d. Performance budgeting portfolios 4. Tutorial exercises 4.a. Variation on the ERC portfolio 4.b. Weight concentration of a portfolio 4.c. The optimization problem of the ERC portfolio 4.d. Risk parity funds Part 3. Smart Beta, Factor Investing and Alternative Risk Premia 1. Risk-based indexation 1.a. Capitalization-weighted indexation 1.b. Risk-based portfolios 1.c. Comparison of the four risk-based portfolios 1.d. The case of bonds 2. Factor investing 2.a. Factor investing in equities 2.b. How many risk factors? 2.c. Construction of risk factors 2.d. Risk factors in other asset classes 3. Alternative risk premia 3.a. Definition 3.b. Carry, value, momentum and liquidity 3.c. Portfolio allocation with ARP 4. Equally-weighted portfolio 4.b. Most diversified portfolio 4.c. Computation of risk-based portfolios 4.d. Building a carry trade exposure Part 4. Green and Sustainable Finance, ESG Investing and Climate Risk 1. ESG investing 1.a. Introduction to sustainable finance 1.b. ESG scoring 1.c. Performance in the stock market 1.d. Performance in the corporate bond market 2. Climate risk 2.a. Introduction to climate risk 2.b. Climate risk modeling 2.c. Regulation of climate risk 2.d. Portfolio management with climate risk 3. Sustainable financing products 3.a. SRI Investment funds 3.b. Green bonds 3.c. Social bonds 3.d. Other sustainability-linked strategies 4. Impact investing 4.a. Definition 4.b. Sustainable development goals (SDG) 4.c. Voting policy, shareholder activism and engagement 4.d. The challenge of reporting 5. Tutorial exercises 5.a. Probability distribution of an ESG score 5.b. Enhanced ESG score & tracking error control Part 5. Machine Learning in Asset Management 1. Standard optimization algorithms 1.b. Machine learning optimization algorithms 1.c. Application to portfolio allocation 2. Pattern learning and self-automated strategies 3. Market generators 4. Portfolio optimization with CCD and ADMM algorithms 4.b. Regularized portfolio optimization

We develop a method that identifies the attention paid by earnings call participants to firms’ climate change exposures. The method adapts a machine learning keyword discovery algorithm and captures exposures related to opportunity, physical, and regulatory shocks associated with climate change. The measures are available for more than 10,000 firms from 34 countries between 2002 and 2020. We show that the measures are useful in predicting important real outcomes related to the net-zero transition, in particular, job creation in disruptive green technologies and green patenting, and that they contain information that is priced in options and equity markets.

We show that engagement on environmental, social, and governance issues can benefit shareholders by reducing firms’ downside risks. We find that the risk reductions (measured using value at risk and lower partial moments) vary across engagement types and success rates. Engagement is most effective in lowering downside risk when addressing environmental topics (primarily climate change). Further, targets with large downside risk reductions exhibit a decrease in environmental incidents after the engagement. We estimate that the value at risk of engagement targets decreases by 9% of the standard deviation after successful engagements, relative to control firms.

We compile a novel dataset on mandatory environmental, social, and governance (ESG) disclosure around the world to analyze the stock liquidity effects of such disclosure mandates. We document a positive effect of ESG disclosure mandates on firm-level stock liquidity. The effects are strongest if the disclosure requirements are implemented by government institutions, not on a comply-or-explain basis, and coupled with strong enforcement by informal institutions. Firms with weaker information environments benefit more from ESG disclosure mandates. Our results support the view that ESG disclosure regulation improves the information environment and has beneficial capital market effects.

Through a survey and analyses of observational data, we provide systematic evidence that institutional investors value and demand climate risk disclosures. The survey reveals the investors have a strong demand for climate risk disclosures, and many actively engage their portfolio firms for improvements. Empirical analyses of holdings data corroborate this evidence by showing a significantly positive association between climate-conscious institutional ownership and better firm-level climate risk disclosure. We establish further evidence of institutional investors’ influence on firms’ climate risk disclosures by examining a shock to the climate risk disclosure demand of French institutional investors (French Article 173).

This paper introduces a new measure of a firm’s negative impact on biodiversity, the corporate biodiversity footprint, and studies whether it is priced in an international sample of stocks. On average, the corporate biodiversity footprint does not explain the cross-section of returns between 2019 and 2022. However, a biodiversity footprint premium (higher returns for firms with larger footprints) began emerging in October 2021 after the Kunming Declaration, which capped the first part of the UN Biodiversity Conference (COP15). Consistent with this finding, stocks with large footprints lost value in the days after the Kunming Declaration. The launch of the Taskforce for Nature-related Financial Disclosures (TNFD) in June 2021 had a similar effect. These results indicate that investors have started to require a risk premium upon the prospect of, and uncertainty about, future regulation or litigation to preserve biodiversity.

The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating the market-based premium associated with carbon-transition risk in a cross-section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.

This working paper is written by Tinghua Duan (IESEG School of Management), Frank Weikai Li (Singapore Management University), and Hong Zhang (Singapore Management University). Economists have long argued that carbon pricing is the most flexible and cost-effective method to mitigate climate change. A major block to pricing carbon pollution, however, is concerns about economic costs. In this paper, we examine the impacts of carbon pricing policies on the operating performance and market value of publicly listed firms around the world. We conduct the most comprehensive study to date of the impacts of carbon pricing on firm performance, using a sample of 104,100 firm-year observations covering 16,222 unique firms across 52 countries. Using the staggered enactment of carbon pricing initiatives across jurisdictions and a triple difference approach, we find a significant reduction in the profitability and market value of carbon-intensive firms relative to low-emission firms after the enactment of carbon pricing policies. Further analyses show that the reduction in firm profits is driven by both a decrease in sales growth and an increase in operating costs. The reduction in firm value is driven by both an increase in the cost of capital and a decrease in expected future cash flows. Relative to low-emission firms, carbon-intensive firms also cut investments and lay off employees more, and they save more out of their cash flows, indicating tightened financial constraints. Exploiting cross-country heterogeneity, we find a stronger effect of carbon pricing on the profits of firms headquartered in North America and in countries that rely more on fossil fuel for energy. Overall, our findings uncover the large distributional impacts of carbon pricing policies on individual firms and complements prior studies focusing on macroeconomic impacts. The large distributional impacts of carbon pricing policies suggest that targeted fiscal policies could be an effective way not only to reduce the economic costs of carbon pricing on the most affected firms and households but also to gain public support.

This handbook in Sustainable Finance corresponds to the lecture notes of the course given at University Paris-Saclay, ENSAE and Sorbonne University. It covers the following chapters: 1. Introduction, 2. ESG Scoring, 3. Financial Performance of ESG Investing, 4. Sustainable Financial Products, 5. Impact Investing, 6. Voting Policy & Engagement, 7. Extra-financial Accounting, 8. Economic Modeling of Climate Change, 9. Climate Risk Measures, 10. Transition Risk Modeling, 11. Portfolio Optimization, 12. Physical Risk Modeling, 13. Climate Stress Testing, 14. Conclusion, 15. Appendix A Technical Appendix, 16. Appendix B Solutions to the Tutorial Exercises.

Before directly addressing the Response to critique and further elaboration (hereafter “Comment”), written by Patrick Bolton and Marcin Kacperczyk (BK), a few thanks are in order. First, we thank the editor, Alex Edmans, both for providing BK the opportunity to directly comment on our paper as well as giving us the opportunity to respond. We believe that open intellectual debate is vital, especially given the topic at hand. Directly facilitating such a conversation in conjunction with the paper’s publication in RF seems to us a good way to showcase various perspectives with equal prominence. Second, we thank BK for taking up the offer to engage with us within this context. We believe direct engagement is the best way to advance scholarly debate on whether and how investors consider carbon emissions information. In what follows, we write our rejoinder to BK’s Comment in the format of a response memo, i.e., we reproduce BK’s main points (with some paraphrasing) and respond to each individually in turn. We believe this is the clearest – and, importantly, most parsimonious – way to provide our thoughts.

This paper examines the channels via which climate change and policies to mitigate it could affect a central bank’s ability to meet its monetary and financial stability objectives. We argue that two types of risks are particularly relevant for central banks. First, a weather-related natural disaster could trigger financial and macroeconomic instability if it severely damages the balance sheets of households, corporates, banks, and insurers (physical risks). Second, a sudden, unexpected tightening of carbon emission policies could lead to a disorderly re-pricing of carbon-intensive assets and a negative supply shock (transition risks). Climate-related disclosure could facilitate an orderly transition to a low-carbon economy if it helps a wide range of investors better assess their financial risk exposures.

We develop a dynamic model where heterogeneous firms take investment decisions depending on their beliefs on future carbon prices. A policy-maker announces a forward-looking carbon price schedule but can decide to default on its plans if perceived transition risks are high. We show that weak policy commitment, especially when combined with ambitious mitigation announcements, can trap the economy into a vicious circle of credibility loss, carbon-intensive investments and increasing risk perceptions, ultimately leading to a failure of the transition. The presence of behavioural frictions and heterogeneity – both in capital investment choices and in the assessment of the policy-maker’s credibility – has strong non-linear effects on the transition dynamics and the emergence of ‘high-carbon traps’. We identify analytical conditions leading to a successful transition and provide a numerical application for the EU economy.

It is increasingly recognized that a transition to sustainable finance is crucial to scale up the low-carbon investments needed to achieve the global climate targets. A main barrier to portfolios’ decarbonization is the lack of conclusive evidence on whether low-carbon investments add value to a portfolio, and on whether markets react to climate announcements by rewarding (penalizing) low-carbon (carbon-intensive) assets. To fill this gap, we develop an empirical analysis of the low-carbon and carbon-intensive indices for the EU, US and global stock markets. We test if financial markets are pricing the Paris Agreement (PA) by decreasing (increasing) the systematic risk and increasing (decreasing) the portfolio weights of low-carbon (carbon-intensive) indices afterwards. We find that after the PA the correlation among low-carbon and carbon-intensive indices drops. The overall systematic risk for the low-carbon indices decreases consistently, while stock markets’ reaction is mild for most of carbon-intensive indices. Moreover, the weight of the low-carbon indices within an optimal portfolio tends to increase after the PA. This evidence suggests that stock market investors have started to consider low-carbon assets as an appealing investment opportunity after the PA but have not penalized yet carbon-intensive assets.

The Paris Agreement aimed at keeping global temperature increase below the 2 degrees C target has triggered a growing momentum for green finance. Indeed, massive investments in the low-carbon energy transition are needed to retrofit the whole economy but capital is still locked-in into carbon-intense investments exposed to the risk of stranded assets. Both business and financial actors, and policy-makers have been increasingly advocating for market-based solutions to climate change (such as the Emission Trading Scheme or a carbon tax) but their recent applications did not deliver as expected. The slow increase of new green projects also slows down the further development of new green financial products such as green bonds, whose market has kept expanding in the last few years. In addition, G20 governments still highly subsidize fossil fuels extraction, production and consumption, thus contributing to increase uncertainty for investors on the irreversibility of the shift towards renewable energy. In this paper we focus on the role of public policy and public finance as either a driver or an obstacle for the low-carbon transition. By applying the EIRIN Stock-Flows Consistent (SFC) flow-funds behavioural model (Monasterolo and Raberto 2017), we analyse decarbonization scenarios characterized by: – The gradual phasing out of fossil fuels subsidies in industrialized but fossil dependent countries, – The gradual introduction of green public measures to decrease the costs of renewable energy investments (e.g. solar panels) for utility companies, financed either through fiscal measures (i.e. general taxation) or through the issuance of green sovereign bonds. We display their effects on firms’ investments, capital accumulation and unemployment in the green and brown sectors, on bank’s liquidity and credit market performance (endogenous money creation), on the bonds market, and on income inequality. We find that phasing out fossil fuels subsidies brings positive externalities for the economy as a whole: governments could find fiscal space to support green new projects without increasing public debt and deficit, and contain inequality from wealth concentration in mining companies. Green scenarios differ in terms of distributive effects and macroeconomic performance because of the different type of public support used. Under the model’s conditions, green bonds have less distributive effects than green fiscal measures because the effect of the latter on the households (workers/capitalists) depends on how regressive the tax system is, and on the level of fiscal compliance in the country. However, green sovereign bonds could lead to wealth concentration in the commercial bank, and to moral hazard for the central bank (who could accept the green bonds as a collateral in case of green Quantitative Easing) in absence of a harmonized classification for green bonds and withstanding green projects. Not Available for Download Add Paper to My Library Share: Fossil Fuels versus Green Subsidies: A Stock-Flows Consistent Model of Public Policies for the Low-Carbon Transition Posted: 8 Jun 2017 Irene Monasterolo Utrecht University Marco Raberto Università degli Studi di Genova – DIME – Department of Mechanics, Energetics, Management and Transportation Date Written: June 8, 2017 Abstract The Paris Agreement aimed at keeping global temperature increase below the 2 degrees C target has triggered a growing momentum for green finance. Keywords: Flow-fund behavioural model, Stock-Flow Consistency, fossil fuels subsidies, green fiscal measures, green sovereign bonds, distributive effects Suggested Citation: Monasterolo, Irene and Raberto, Marco, Fossil Fuels versus Green Subsidies: A Stock-Flows Consistent Model of Public Policies for the Low-Carbon Transition (June 8, 2017). Available at SSRN: https://ssrn.com/abstract=2983140 Not Available for Download 0 References 0 Citations Do you have a job opening that you would like to promote on SSRN? Place Job Opening

This study examines the recent literature on the expectations, beliefs and perceptions of investors who incorporate Environmental, Social, Governance (ESG) considerations in investment decisions with the aim to generate superior performance and also make a societal impact. Through the lens of equilibrium models of agents with heterogeneous tastes for ESG investments, green assets are expected to generate lower returns in the long run than their non- ESG counterparts. However, at the short run, ESG investment can outperform non-ESG investment through various channels. Empirically, results of ESG outperformance are mixed. We find consensus in the literature that some investors have ESG preference and that their actions can generate positive social impact. The shift towards more sustainable policies in firms is motivated by the increased market values and the lower cost of capital of green firms driven by investors’ choices.

This study examines whether companies employ corporate social responsibility (CSR) to improve employee engagement and mitigate adverse behavior at the workplace (e.g., shirking, absenteeism, etc.). We exploit plausibly exogenous changes in state unemployment insurance (UI) benefits from 1991 to 2013. Higher UI benefits reduce the cost of being unemployed and hence increase employees’ incentives to engage in adverse behavior. We find that higher UI benefits are associated with higher engagement in employee-related CSR. This finding suggests that companies use CSR as a strategic management tool — specifically, an employee governance tool — to increase employee engagement and counter the possibility of adverse behavior. We further examine plausible mechanisms underlying this relationship.

This study examines the integration of corporate social responsibility (CSR) criteria in executive compensation, a relatively recent practice in corporate governance. We construct a novel database of CSR contracting and document that CSR contracting has become more prevalent over time. We further find that the adoption of CSR contracting leads to i) an increase in long-term orientation; ii) an increase in firm value; iii) an increase in social and environmental initiatives; iv) a reduction in emissions; and v) an increase in green innovations. These findings are consistent with our theoretical arguments predicting that CSR contracting helps direct management’s attention to stakeholders that are less salient but financially material to the firm in the long run, thereby enhancing corporate governance.

In this study, we assess the causal impact of stakeholder orientation on innovation. To obtain exogenous variation in stakeholder orientation, we exploit the enactment of state-level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. Using a difference-in-differences methodology, we find that the enactment of constituency statutes leads to a significant increase in the number of patents and citations per patent. We further examine the mechanisms through which stakeholder orientation fosters innovation. In particular, we argue and provide evidence suggesting that stakeholder orientation sparks innovation by i) promoting a secure work environment that is conducive to experimentation, and ii) enhancing the satisfaction of various stakeholders.

This study examines whether corporate social responsibility (CSR) improves firms’ competitiveness in the market for government procurement contracts. To obtain exogenous variation in firms’ social engagement, I exploit a quasi-natural experiment provided by the enactment of state-level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. Using constituency statutes as instrumental variable (IV) for CSR, I find that companies with higher CSR receive more procurement contracts. The effect is stronger for more complex contracts and in the early years of the government-company relationship, suggesting that CSR helps mitigate information asymmetries by signaling trustworthiness. Moreover, the effect is stronger in competitive industries, indicating that CSR can serve as a differentiation strategy to compete against other bidders.

This paper examines whether — in the absence of mandated disclosure requirements — shareholder activism can elicit greater disclosure of firms’ exposure to climate change risks. We find that environmental shareholder activism increases the voluntary disclosure of climate change risks, especially if initiated by institutional investors, and even more so if initiated by long-term institutional investors. We also find that companies that voluntarily disclose climate change risks following environmental shareholder activism achieve a higher valuation post disclosure, suggesting that investors value transparency with respect to firms’ exposure to climate change risks.

We examine whether companies respond to the threat of knowledge spillovers by strategically increasing their engagement in corporate social responsibility (CSR). To obtain exogenous variation in the threat of knowledge spillovers, we exploit a natural experiment provided by the rejection of the inevitable disclosure doctrine (IDD) by several U.S. states. Using a difference-in-differences methodology we find that, following the rejection of the IDD, companies significantly increase their CSR. Our proposed rationale is that CSR helps mitigate knowledge spillovers by i) reducing employees’ propensity to join a rival firm, and ii) reducing employees’ propensity to disclose the firm’s valuable knowledge even if they join a rival firm. Evidence from a laboratory experiment, an online experiment, and a survey of knowledge workers is supportive of these arguments.

In 2017, global investment in renewables and energy efficiency declined by 3% and there is a risk that it will slow further; clearly fossil fuels still dominate energy investment. This could threaten the expansion of green energy needed to provide energy security and meet climate and clean air goals. Several developed and developing economies are still following pro-coal energy policies and the extra CO2 generated by new coal-fired power plants could more than wipe out any reductions in emissions made by other nations. Finance is the engine of development of infrastructure projects, including energy projects. Generally financial institutions show more interest in fossil fuel projects than green projects, mainly because there are still several risks associated with these new technologies and they offer a lower rate of return. If we want to achieve sustainable development goals, we need to open a new file for green projects and scale up the financing of investments that provide environmental benefits, through new financial instruments and new policies, such as green bonds, green banks, carbon market instruments, fiscal policy, green central banking, financial technologies, community-based green funds, etc., which are collectively known as “green finance”.

We examine whether impact investing is more effective in fostering business venture success and social impact when investments are directed toward ventures located in disadvantaged urban areas (that is, areas with high crime, unemployment, and poverty) compared to similar investments directed toward ventures located outside these areas. We explore this question in the context of loans made to business ventures in French “banlieues” vs. “non-banlieues.” We find that loans issued to banlieue ventures yield greater improvements in financial performance, as well as greater social impact in terms of the creation of local employment opportunities, quality jobs, and jobs for minorities. These results suggest that impact investors are able to contract with ventures of greater unrealized potential in banlieues, as banlieue ventures tend to be left out of the traditional loan market. This is confirmed in a controlled lab experiment in which participants—business professionals who are asked to act as loan officers—are randomly assigned to identical business ventures that only differ in their geographic location. We find that participants are indeed less likely to grant loans to banlieue ventures compared to non-banlieue ventures, despite the ventures being identical.

This article evaluates a large collection of systemic risk measures based on their ability to predict macroeconomic downturns. We evaluate 19 measures of systemic risk in the US and Europe spanning several decades. We propose dimension reduction estimators for constructing systemic risk indexes from the cross section of measures and prove their consistency in a factor model setting. Empirically, systemic risk indexes provide significant predictive information out-of-sample for the lower tail of future macroeconomic shocks.

We analyze survey data on ESG beliefs and preferences in a large panel of retail investors linked to administrative data on their investment portfolios. The survey elicits investors’ expectations of long-term ESG equity returns and asks about their motivations, if any, to invest in ESG assets. We document four facts. First, investors generally expected ESG investments to underperform the market. Between mid-2021 and late-2022, the average expected 10-year annualized return of ESG investments relative to the overall stock market was −1.4%. Second, there is substantial heterogeneity across investors in their ESG return expectations and their motives for ESG investing: 45% of survey respondents do not see any reason to invest in ESG, 25% are primarily motivated by ethical considerations, 22% are driven by climate hedging motives, and 7% are motivated by return expectations. Third, there is a link between individuals’ reported ESG investment motives and their actual investment behaviors, with the highest ESG portfolio holdings among individuals who report ethics-driven investment motives. Fourth, financial considerations matter independently of other investment motives: we find meaningful ESG holdings only for investors who expect these investments to outperform the market, even among those investors who reported that their most important ESG investment motives were ethical or hedging reasons.

We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. We use the measure to study top US financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.

Linking a nationally representative survey to individual pension data, we show how environmental fears, manifesting in extreme beliefs about future climate calamities, are associated with individual portfolio rebalancing decisions. Extreme weather conditions in Sweden in 2014 stoked fears of future environmental calamities, especially in those living closer to the catastrophes. After this heat wave, but not before, investors who fear climate-related catastrophes rebalanced their retirement portfolios towards green investments. This aligns with other behaviors: they also report that they recycle more than their neighbors, think green investments outperform, and are willing to pay higher fees for green mutual funds.

Corporate Social Responsibility (CSR) refers to the incorporation of Environmental, Social, and Governance (ESG) considerations into corporate management, financial decision making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities (e.g. pollution) they create, and are willing to be accountable to shareholders as well as a broader group of stakeholders (employees, customers, suppliers, local communities,…). Over the past two decades, various rating agencies developed firm-level measures of ESG performance, which are widely used in the literature. A problem for past and a challenge for future research is that these ratings show inconsistencies, which depend on the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing (SRI). The return implications of investing in the stocks of socially responsible firms, the search for an EGS factor, as well as the performance of SRI funds are the dominant topics. SR funds apply negative screening (exclusion of ‘sin’ industries), positive screening, as well as activism through proxy voting or direct engagement. In this context, one wonders whether responsible investors are willing to trade off financial returns with a ‘moral’ dividend (the return given up in exchange for an increase in utility driven by the knowledge that one invests ethically). A recent literature concentrates on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic de-carbonization as climate change affects financial markets and investor behavior.

We analyze an extensive proprietary database of corporate social responsibility engagements with U.S. public companies from 1999-2009. Engagements address environmental, social, and governance concerns. Successful (unsuccessful) engagements are followed by positive (zero) abnormal returns. Companies with inferior governance and socially conscious institutional investors are more likely to be engaged. Success in engagements is more probable if the engaged firm has reputational concerns and higher capacity to implement changes. Collaboration among activists is instrumental in increasing the success rate of environmental/social engagements. After successful engagements, particularly on environmental/social issues, companies experience improved accounting performance and governance and increased institutional ownership.

Corporate social responsibility has gone mainstream, and many companies have taken meaningful steps towards a more sustainable future. Yet global environmental indicators continue to worsen, and individual corporate efforts may be hitting the point of diminishing returns. Voluntary action by the private sector is not a panacea—regulatory action by the public sector remains necessary. Such public sector progress will be more likely if it is supported by influential segments of the business community. Recent court rulings in the U.S. make it easy for companies to hide their political activities from the public, yet the indicators of CSR used by ratings agencies and socially responsible investment funds mostly ignore corporate political action. We argue that it is time for CSR metrics to be expanded to critically assess and evaluate firms based on the sustainability impacts of their public policy positions. To enable such assessments, firms need to become as transparent about their political activity as many have become about their CSR efforts, and CSR rating services and ethical investment funds need to demand such information from firms and include an assessment of corporate political activity in their ratings.

In this study, we link records of firm performance, forecasts of analysts, and the returns after earnings announcements to firm-specific measures of heat exposure for more than 13,000 firms in 93 countries from 1995 to 2019. We find that increasing exposure to extremely high temperatures reduces firms’ revenues and operating income. Moreover, the deviation in analyst estimates from actual financial performance and the earnings announcement returns become more negative when firms’ heat exposure increases. These findings indicate that investors do not fully anticipate the economic repercussions of heat as a first-order physical climate risk.

English Abstract: Sustainable investments. ESG stock indexes at the global level (Stoxx Global ESG leaders and MSCI world ESG) and in the euro area (Euro Stoxx ESG leaders, Ftse 4Good EU 50, MSCI EMU ESG screened index) show a high level of alignment in performance. The degree of coherence, however, tends to be not stable through time and decreases if we focus on volatility. In the euro area, moreover, there is a high overlapping degree between ESG stock index constituents and conventional ones (i.e., 52% between Stoxx Euro ESG Leaders and Eurostoxx 50, 82% between MIB ESG and Ftse Mib). Lastly the “greenium”, that is the risk premium due to the eco-sustainability of a firm (so-called greenness), which is based on listed firm returns, tends to be more volatile during financial market stress periods of time and shows a growing trend starting from May 2020 to the latest available estimate. The Sustainalytics company-level ESG risk score measures firms’ exposure to ESG risks (i.e., climate changes, carbon footprint, transition risks, safety in the workplace, governance transparency, management remuneration policies). In the euro area it registers a decreasing trend from December 2019 to December 2022, and it remains approximately stable in 2023, showing that firms are increasingly improving their abilities in managing sustainability-related risks. Moreover, utility and energy sectors exposure to ESG risks tends to be higher compared to the exposure of industrial and financial sectors. In Italy, ESG risk scores are on average in line with euro area; the exposure to risk factors in the financial sector, however, tends to be higher compared to what is registered in the corporate sector. Lastly, the Report includes a focus on firms listed in Italy which aims at verifying if both Sustaynalitics ESG risk score and Refinitiv ESG rating are correlated with main firms’ characteristics (i.e., performance, volatility, liquidity, financial leverage, value at risk, price on earnings, price to book value, size and ROA). In more detail, by applying cluster analysis techniques in which ESG score is treated as a discriminant factor, two groups of firms are obtained which significantly differs only with respect of size and liquidity. In particular, companies with high ESG rating tend to be more liquid and have a bigger size, while there are no significant differences between the two groups in terms of performance, volatility and market evaluation. The analysis of ESG bonds listed in Italy relies on International Capital Market Association (ICMA) principles to identify green, social, sustainable and sustainable linked bonds. Given that around 12% of the ESG bonds listed on Italian financial markets is not included in Borsa Italiana “Green and Social bonds List”, there is evidence regarding some misalignments among ESG securities’ classifications. ESG bonds are mainly supranational green bonds with a time to maturity between 7 and 10 years. Moreover, 54% of ESG bonds listed on Borsa Italiana has a minimum trade size lower than or equal to 1.000 euro, thus within the reach of retail investors, while 69% is listed on Mot bond market segment. Finally, the Report includes analysis on open-ended sustainable funds available for sale in Italy identified on the basis of Morningstar definitions. Most of sustainable funds has an average or above average Morningstar ESG rating (59%), belongs to art. 8 SFDR classification (74%) and refers to equity category (51%); only 8% is domiciled in Italy, while for around 60%, the age (difference between current date and inception date) is lower than 6 years. Moreover, focusing only on the equity portfolio component, on average, 70% of the equity portfolio is invested in large cap. Cryptoassets. Cryptoasset markets have been severely affected by the negative events of 2022. Indeed, the market value of major cryptocurrencies dropped by more than 50% in September 2023 compared to the end of 2021, following a 65% drop in 2022 and a partial recovery in the current year. The market value of cryptocurrencies remains low compared to equity markets capitalisation (2.1% of the aggregate value of American markets, 3.4% of Asian markets and 4.4% of European and Middle Eastern markets). More than 60% of the market value of cryptocurrencies refers to bitcoin and ether. The total value locked in decentralised finance protocols (Decentralised Finance or DeFi) also exhibited a sharp decline (-70% in September 2023 compared to the end of 2021 and -63% in 2022). The DeFi sector is characterised by a high heterogeneity both in the types of existing protocols and, consequently, in the liquidity pools returns despite being highly concentrated in terms of the underlying technology, with around 60% of protocols based on the Ethereum blockchain. Cryptocurrencies continue to be characterised by highly volatile prices. As of September 2023, bitcoin’s annualised return was only slightly higher than returns of other non-digital assets while showing far greater volatility. Transaction volumes of bitcoin and ether have fallen significantly since the end of the previous year, and the dynamics of the ratio between market values and transaction volumes (the so-called network value to transactions ratio or NVT) suggest a bearish outlook for the markets of the two largest cryptocurrencies, although the trend in futures prices has stabilised during this year after the sharp drop in 2022. Signs of structural price instability also emerge from the share of inactive cryptocurrencies, i.e. those that have not been traded in the past year, which is close to 60% and 70% for bitcoin and ether respectively. The correlation between bitcoin price dynamics and those of the major stock indexes is positive in 2023. The correlation appears to be less pronounced for European indexes than for US indexes and declining during the current year compared to 2022. The cybersecurity of applications underlying cryptocurrencies remains a critical issue: statistics on 188 cryptocurrencies exchanges show that only 14 can be considered very secure and that the share of those with poor cybersecurity ratings has increased compared to 2022. According to other sources, the total amount of funds stolen by hackers in crypto attacks stood at 3.8 billions of dollar in 2022, up slightly from 3.3 billions in the previous year. Compared to 2022, interest in cryptoassets has declined sharply, as evidenced by the drop in both the number of searches made on the internet for terms associated with them and the number of active addresses of the main cryptocurrencies. Investments in the sector have also dropped. Estimates of cryptoasset owners indicate that, globally, almost 60% refer to Asian countries and only 4% to Western European countries. Among the largest European economies, the share of the population owning cryptoassets ranges from slightly less than 6% in France and the UK to a little more than 2% in Italy. Italian Abstract: Gli investimenti sostenibili. Gli indici azionari ESG globali (Stoxx Global ESG leaders e MSCI world ESG) presentano un elevato grado di allineamento nella performance. Tale livello di coerenza fra gli indici non è, tuttavia, stabile nel tempo e si riduce se si utilizza come parametro la volatilità invece che il rendimento. Analoga tendenza si riscontra se si misura il grado di coerenza di indici azionari riferiti all’area euro (Euro Stoxx ESG leaders, Ftse 4Good Europe 50, MSCI EMU ESG screened index). Sempre nell’area euro si rileva, inoltre, un elevato grado di sovrapposizione fra la lista di società costituenti gli indici azionari ESG rispetto agli indici convenzionali (52% fra Stoxx Euro ESG Leaders e Euro Stoxx 50, 82% fra Mib ESG e Ftse Mib). Infine, l’andamento dell’indicatore di “greenium”, ossia del premio al rischio connesso con la eco-sostenibilità (cosiddetta greenness) di una impresa e basato sui rendimenti delle società quotate, mostra una significativa volatilità soprattutto in corrispondenza di periodi di stress sui mercati finanziari e un trend crescente a partire da maggio 2020 fino all’ultima rilevazione disponibile. Il Sustainalytics ESG risk score, che rappresenta una misurazione sintetica dell’esposizione delle società a fattori di rischio ESG (ad esempio, cambiamenti climatici, rischio di transizione, condizioni lavorative inique, mancanza di inclusione sociale, trasparenza nella governance, politiche di remunerazione del management) registra un andamento positivo nell’area euro con un trend decrescente da dicembre 2019 a dicembre 2022, senza subire ulteriori variazioni nel 2023, ossia confermando un tendenziale aumento della capacità delle imprese nel gestire i sustainability-related risks. Inoltre, disaggregando settorialmente l’indicatore si rileva che in media l’esposizione ai fattori di rischio delle utilities e delle società che producono energia è più elevata rispetto a quella delle imprese appartenenti al settore manifatturiero oppure al comparto finanziario. In Italia, gli ESG risk scores si attestano su valori in linea con quelli dell’area euro; a livello settoriale, tuttavia, l’esposizione ai fattori di rischio del comparto finanziario appare in media più elevata rispetto al settore corporate. La sezione investimenti sostenibili del Rapporto include, poi, un focus sulle società quotate in Italia finalizzato a verificare se l’ESG risk score e l’ESG Refinitiv rating siano correlati con alcune delle principali caratteristiche delle imprese (performance, volatilità, liquidità, leverage finanziario, value at risk, price on earnings, price to book value, capitalizzazione e ROA). In dettaglio, utilizzando tecniche di cluster analysis, per distinguere le società sulla base dell’ESG rating, si evidenzia come il gruppo di imprese con score di sostenibilità più elevato si differenzia dall’altro gruppo solo per la dimensione e la liquidità. In particolare, il cluster di società con ESG rating più alto è rappresentato dalle imprese con maggiore liquidità e capitalizzazione mentre non si registrano differenze significative tra i due gruppi in termini di performance, volatilità e valutazioni di mercato. L’analisi delle obbligazioni ESG inclusa nel Rapporto si fonda sull’identificazione dei titoli sulla base degli International Capital Market Association (ICMA) principles e si focalizza sui titoli quotati in Italia. Il 12% circa delle obbligazioni ESG così definite non è incluso nella lista dei “Green e Social bonds” di Borsa Italiana, ponendo in evidenza l’esistenza di alcuni disallineamenti nelle classificazioni del profilo di sostenibilità dei titoli. Le obbligazioni ESG sono prevalentemente green bonds (53%) appartenenti al settore sovranazionale (54%) con un time to maturity compreso fra i 7 e i 10 anni (43%). Inoltre, il 54% dei titoli ESG quotati su Borsa Italiana presenta un lotto minimo minore uguale a 1.000 euro, quindi accessibile agli investitori retail, mentre il 69% è negoziato sul segmento di mercato Mot. Infine, la classificazione dei fondi aperti sostenibili disponibili per la vendita in Italia è stata effettuata adottando i criteri per l’identificazione dei fondi ESG di Morningstar. La maggiore parte dei fondi presenta un Morningstar sustainability rating superiore alla media (59%), si classifica art. 8 del Regolamento SFDR (74%) e ricade nella categoria fondi azionari (51%); solo l’8% è domiciliato in Italia, mentre per il 60% sono passati meno di 6 anni dalla data di istituzione (inception date). Inoltre, focalizzando l’attenzione esclusivamente sulla componente azionaria del portafoglio, si rileva che in media il 70% del net asset value è investito in large cap prevalentemente di paesi avanzati. Le criptoattività. I mercati delle criptoattività hanno subito pesanti ripercussioni a seguito degli eventi negativi che hanno caratterizzato il 2022. A settembre 2023 il valore di mercato delle principali criptovalute risultava infatti inferiore di oltre il 50% rispetto a quello registrato a fine 2021, in conseguenza di un ribasso del 65% nel 2022 e di un parziale recupero nell’anno in corso. Nel confronto con la capitalizzazione dei mercati azionari il valore di mercato delle criptovalute resta contenuto (2,1% del valore aggregato dei mercati americani, 3,4% dei mercati asiatici e 4,4% dei mercati europei e mediorientali). Oltre il 60% del valore di mercato delle criptovalute è riferibile a bitcoin ed ether. Anche l’ammontare di fondi depositati nelle applicazioni di finanza decentralizzata (Decentralised Finance o DeFi), ha esibito un netto calo (-70% a settembre 2023 rispetto alla fine del 2021 e -63% solo nel 2022). Il settore DeFi si caratterizza per una estrema eterogeneità nelle tipologie di protocolli in essere e, conseguentemente, nei rendimenti dei relativi pool di liquidità pur essendo molto concentrato sotto il profilo della sottostante tecnologia, con circa il 60% dei protocolli basati sulla blockchain Ethereum. Le criptovalute continuano a connotarsi per prezzi estremamente volatili. A settembre 2023 il rendimento annualizzato del bitcoin risultava infatti solo lievemente superiore a quello riferibile ad altre categorie di asset non digitali pur mostrando una volatilità di gran lunga superiore. I volumi di transazioni di bitcoin ed ether si sono drasticamente ridotti dalla fine del precedente anno e la dinamica del rapporto tra valori di mercato e volume delle transazioni (il cosiddetto network value to transactions ratio o NVT) suggerisce il sussistere di prospettive ribassiste sui mercati delle due maggiori criptovalute, sebbene l’andamento dei prezzi dei futures si sia stabilizzato nel corso dell’anno dopo il brusco calo del 2022. Segni di strutturale instabilità dei prezzi emergono anche dalla quota di criptovalute inattive, ossia che non sono state oggetto di transazioni nell’ultimo anno, che si colloca su valori prossimi al 60% e 70% rispettivamente per bitcoin ed ether. La correlazione tra dinamiche del prezzo del bitcoin e quelle dei principali indici azionari risulta positiva nel 2023. Il legame appare meno marcato per gli indici europei rispetto a quelli statunitensi e in calo nell’anno in corso rispetto al 2022. La sicurezza cibernetica delle applicazioni sottostanti alle criptoattività resta un profilo critico: alcune statistiche relative a 188 piattaforme di scambio di criptovalute evidenziano che solo 14 possono ritenersi molto sicure e che, rispetto al 2022, è aumentata la quota di quelle che invece presentano scarse valutazioni di sicurezza cibernetica. Secondo altre fonti, nel 2022 l’ammontare complessivo di fondi sottratti in attacchi hacker su criptoattività si è collocato a 3,8 miliardi di dollari, in lieve crescita dai 3,3 miliardi del precedente anno. Rispetto al 2022 l’interesse verso le criptoattività si è nettamente ridotto come attesta il calo sia del numero di ricerche effettuate in rete di termini a esse associati sia del numero di indirizzi attivi delle maggiori criptovalute. Anche gli investimenti nel settore sono fortemente calati. Stime sui detentori di criptoattività indicano che, a livello globale, quasi il 60% è riferibile ai paesi asiatici e solo il 4% ai paesi dell’Europa occidentale. Tra le maggiori economie europee la quota di popolazione che detiene criptoattività oscilla tra poco meno del 6% in Francia e Regno Unito e poco più del 2% in Italia.

The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007-2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a significant premium for green bonds, suggesting that the positive stock returns are not driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm’s issuance of green bonds is beneficial to its existing shareholders.

Carbon pricing mechanisms and green bond markets are pivotal in addressing climate change and transitioning to sustainable finance. This study examines the interconnectedness between four global carbon price indices and the three largest green bond markets. We use daily data from July 2019 to April 2024, employing quantile-based connectedness analysis to investigate the return and volatility spillovers under normal, bullish, and bearish market conditions. The results reveal that carbon price indices act as net transmitters of shocks, whereas green bond markets are net receivers. Connectedness intensifies during extreme market movements, underscoring the influence of global events. These findings highlight the critical role of carbon prices and green bonds in navigating financial risks and opportunities within the sustainable finance ecosystem.

This study investigates the impact of green bond issuance on green innovation and its underlying mechanisms. We find that green bond issuance promotes green innovation, with stronger effects observed in regions with weaker climate regulation, industries exhibiting better environmental performance, and firms with more concentrated ownership. Further analysis reveals that corporate green bonds facilitate the reallocation of investment capital into research and development, effectively mitigating financial constraints on green innovation. This upsurge in green innovation not only enhances financial performance but also yields specific environmental benefits, such as improved environmental investment and ESG performance. These empirical results underscore the significance of green finance in fostering sustainable corporate innovation and advancing climate governance, rather than merely engaging in green washing practices.

This paper examines the interdependence between green bonds and financial markets in the time-frequency domain by utilizing the multivariate wavelet approach and dynamic connectedness through combining Ensemble Empirical Mode Decomposition (EEMD) with Diebold and Yilmaz (2012) spillover framework. The findings of wavelet multiple correlations indicate that the benefits of diversification opportunities are more evident in the short run. The evidence of wavelet multiple cross-correlations reveals that green bonds and financial markets are highly integrated in the long run. The results of the static connectedness framework explain that the direction and magnitude of spillover behave differently across markets. The world stock market is the net spillover transmitter, while the corporate bond market is the net spillover receiver among the selected markets. The green bond market is receiving more but transmitted less volatility in the present study. The evidence on dynamic connectedness measured by the rolling window approach shows that the interconnection between green bonds and financial markets is volatile over time. These pieces of evidence provide implications to global investors having a strong position in the green bonds market in terms of risk management and portfolio decisions.

Global shifts in perspectives on environmental concerns and the growing significance of large-scale sustainability programs have brought the issue of green financing to the fore of financial research. In terms of volume, this area has demonstrated high growth rates in various types of capital markets. Unfortunately, few studies exist which explore the yields on green bonds in emerging markets in comparison to developed ones. As such, in this paper, we contribute new evidence to the field of green financing and outline several major differences between green issues in these types of capital markets. We study yield premiums of green bonds on a sample of 2,450 green issues and comparable traditional bonds over the period from 2008 to March 2020. We contribute to the literature by new empirical evidence on green financing. Our results provide evidence of small but statistically significant negative premiums on green bonds of 23,4%1 compared to the expected yields for standard issues. We also show that the negative premium on green bonds is more pronounced in developed markets (- 27%2) than in emerging ones (18%3). Moreover, we provide new evidence on the negative premium-liquidity relationship. Our research concludes that negative premiums are related to a higher level of liquidity: green bonds have lower bid-ask spreads and a higher level of liquidity than traditional ones. These conclusions can assist investors, potential issuing companies, and public authorities in achieving a better understanding of the current situation of the green bond market in global terms.

The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating the market-based premium associated with carbon-transition risk in a cross-section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.

Designing policy for climate change requires analyses which integrate the interrelationship between the economy and the environment. We argue that, despite their dominance in the economics literature and influence in public discussion and policymaking, the methodology employed by Integrated Assessment Models (IAMs) rests on flawed foundations, which become particularly relevant in relation to the realities of the immense risks and challenges of climate change, and the radical changes in our economies that a sound and effective response require. We identify a set of critical methodological problems with the IAMs which limit their usefulness and discuss the analytic foundations of an alternative approach that is more capable of providing insights into how best to manage the transition to net-zero emissions.

Recognizing the importance of the second-best nature of economies, the Stern-Stiglitz report on carbon pricing departed from the recommendation of a single carbon price for all uses at all places and times. This paper provides some of the analytics behind these recommendations. First, I analyze the circumstances in which distributional concerns make desirable a tax or regulation inducing significant reductions in carbon usage in a carbon-intensive sector for which consumers are disproportionately rich. Such policies allow lower carbon prices elsewhere without exceeding carbon emission targets. The cost of the resulting production inefficiency may, under the identified circumstances, be less than the distributional benefits. The paper considers the circumstances in which such differential policies may be best implemented through regulation vs. differential pricing, as well as differential effects on political economy and norm setting. Second, I consider the effect of carbon price trajectories on induced innovation, providing general conditions under which the optimal carbon path should, at least eventually, be falling over time. Finally, I revisit the price-versus-quantity debate and highlight important aspects of the dynamic nature of the problem.

The blue bond market has emerged as one of the latest additions in the sustainable debt market. Its goal is to channel funding toward sustainable blue economy projects related to the ocean and freshwater. While the protection of hydric resources has gained importance within the problem of climate change, Sustainable Development Goals linked to water remain the most underfunded. Since the issuance of the first blue bond in the Seychelles in 2018, multiple public and private organizations have turned to the blue bond market to raise funds. However, unlike the green bond market, no comprehensive market overview exists, preventing stakeholders from judging whether this label has been effective in protecting water resources and drawing conclusions on its future potential. This paper draws on an extensive review of academic research and complements it with a unique and comprehensive analysis of blue bonds issued to date, providing a contribution to the literature on sustainable finance. Between 2018 and 2022, 26 blue bond transactions took place, amounting to a total value of USD 5.0 billion, with a 92% CAGR between those years. Currently, blue bonds represent less than 0.5% of the sustainable debt market. The use of proceeds has mostly focused on waste management, biodiversity, and sustainable fisheries, but also ranges across other areas of the sustainable blue economy. Only two-thirds of blue bond issuers report on impact metrics, providing further opportunity to add detail and rigor. We draw comparisons to the more mature green bond market and conclude that a lack of standardized definitions, metrics, and expertise by issuers and investors are significant barriers to the blue bond market. Resolving these barriers is crucial to attract corporations and ensure continued growth of the blue bond market.

In this paper, the effects of environmental regulation are extended to the bond market. Leveraging from the implementation of the new Environmental Protection Law as a quasi-natural experiment, we evaluate that the impact of environmental regulation on the credit spread of corporate bonds in a difference in differences (DID) framework. The findings are as follows: (1) The implementation of the new environmental protection law can significantly increase the credit spread in the secondary market of heavily polluting corporate bonds. After decomposing the bond credit spread into liquidity spread and default spread, this paper finds that the implementation of the new environmental protection law has significantly increased the bond default spread, but has no significant impact on the liquidity spread. (2) The influence of the new environmental protection law on bond credit spreads will weaken with the decrease of customer concentration, the increase of social attention and the initiative of enterprises to improve environmental performance. (3) The mechanism test shows that the increase of bond credit spread caused by the new environmental protection law is mainly realized through punishment effect, investor sentiment effect and resource effect. (4) The new environmental protection law affects the issuance performance of bonds in the primary market. (5) After the implementation of the new Environmental Protection Law, heavily polluting enterprises adopted a more conservative debt strategy and actively reduced the leverage level. (6) This study also considered the heterogeneous influence of enterprise life cycle, local government environmental supervision intensity and bond maturity date. After the implementation of the new Environmental Protection Law, the intensity of environmental supervision of local governments has increased, the maturity of bonds has been extended, and the bond credit spreads of companies in growth and recession have increased more significantly. This study provides valuable insights for evaluating the economic effects of the new Environmental Protection Law, promoting more targeted policy implementation, and achieving a green economic transformation.

This paper considers how financial authorities should react to environmental threats beyond climate change. These include biodiversity loss, water scarcity, ocean acidification, chemical pollution and — as starkly illustrated by the COVID-19 pandemic — zoonotic disease transmission, among others. We first provide an overview of these nature-related financial risks (NRFR) and then show how the financial sector is both exposed to them and contributes to their development via its lending, and via the propagation and amplification of financial shocks. We argue that NRFR — being systemic, endogenous and subject to ‘radical uncertainty’ — cannot be sufficiently managed through ‘market- fixing’ approaches based on information disclosure and quantitative risk estimates. Instead, we propose that financial authorities utilise a ‘precautionary policy approach’, making greater use of qualitative methods of managing risk, to support a controlled regime shift towards more sustainable capital allocation. A starting point would be the identification and exclusion of clearly unsustainable activities (e.g. deforestation), the financing of which should be discouraged via micro- and macro-prudential policy tools. Monetary policy tools, such as asset purchase programmes and collateral operations, as well as central banks’ own funds, should exclude assets linked to such activities.

Ecosystem breakdown driven by climate and land-use pressures – poses systemic macroeconomic and financial risks due to the loss of natural systems within which our economy is embedded. Despite acknowledgement that finance can play an indirect role in driving – and reducing – land-use pressures, there has been limited empirical work identifying the most important financial interactions with such critical ecosystems. Here, we develop a combined environment-financial dataset to explore financial flows associated with two ecosystems – the Brazilian Amazon and Indonesian tropical peatlands – where breaching ecosystem “tipping points” (ETPs) could have irreversible impacts. We use location-specific supply chain data to identify “ETP risk” companies linked to significant land-use change and degradation in these ecosystems and connect this to a newly constructed dataset of financial flows covering lending and capital market activities (equity and debt issuances) over a decade. This identifies a concentrated group of financial institutions in each case. For the Brazilian Amazon, the most important institutions were headquartered primarily in North America and Europe; for the Indonesian peatlands, we primarily map domestic, Chinese, and Japanese institutions. Lending was the dominant type of finance, though debt-based capital markets financing played a significant role. We build on our dataset using financial ratio analysis to show that the influence of finance as a leverage point in ETP risk companies varies substantially. Our findings offer new insights on the indirect drivers of tropical land-use change; the role of finance in sustainability transitions; and the study of environment-related financial risks including implications for financial policy.

This paper considers how financial authorities should react to environmental threats beyond climate change. These include biodiversity loss, water scarcity, ocean acidification, chemical pollution and — as starkly illustrated by the COVID-19 pandemic — zoonotic disease transmission, among others. We first provide an overview of these nature-related financial risks (NRFR) and then show how the financial sector is both exposed to them and contributes to their development via its lending, and via the propagation and amplification of financial shocks. We argue that NRFR — being systemic, endogenous and subject to ‘radical uncertainty’ — cannot be sufficiently managed through ‘market- fixing’ approaches based on information disclosure and quantitative risk estimates. Instead, we propose that financial authorities utilise a ‘precautionary policy approach’, making greater use of qualitative methods of managing risk, to support a controlled regime shift towards more sustainable capital allocation. A starting point would be the identification and exclusion of clearly unsustainable activities (e.g. deforestation), the financing of which should be discouraged via micro- and macro-prudential policy tools. Monetary policy tools, such as asset purchase programmes and collateral operations, as well as central banks’ own funds, should exclude assets linked to such activities.

The climate and biodiversity emergencies require structural economic shifts that will necessitate strategic coordination between macroeconomic policy authorities. The Covid-19 episode saw the implementation of monetary-fiscal policy coordination not seen since the 1970s to avert catastrophic damage to economies caused by pandemic-induced lock-downs. Recent developments suggest these were best understood as emergency short-term responses rather than marking a shift in the consensus that insists on a separation between monetary and fiscal policy spheres that might support a more coordinated policy approach to addressing environmental breakdown. We review the most prominent examples of coordination in high income and emerging market economies in the 2020-2021 period, focusing on the creation of fiscal space and targeted provision of liquidity to strategic sectors of the economy. We consider the lessons and opportunities these policy innovations raise for the development of a precautionary macroeconomic policy approach which seeks to reduce the threat of ecological tipping points, prevent catastrophic losses, and support the Net-Zero transition.

• The financial system is not structurally well equipped to address long-term global public goods issues like planetary health. Relying on the financial system to solve planetary health is therefore challenging. • Planetary health finance should shift current global investment flows towards economic activities compatible with planetary health; it is also important to cease financing those activities that create environmental and health problems. • Public finance has a strong role to play in planetary health to support innovation and crowd-in private actors. • The volume of available financial capital appears to be large enough to be substantially mobilised for planetary health. • Nature conservation finance is a promising approach to target concrete impact on the ground, but it may be difficult to scale to global level. • There is a need to channel capital towards planetary health and manage the related risks to the financial system, but the traditional mechanics of risk pricing cannot work in this case because markets cannot manage the fundamental uncertainty and long time horizons at stake. • A precautionary approach to the financial risks associated with planetary health is needed, as is the application of a new approach to supervision and regulation of the financial system. • Mobilizing finance for planetary health is likely to require deeper regulation of the financial system, although measures taken will strongly depend on each country’s current approach to financial regulation.

Recently, financial institutions have become central in the discussions related to the environmental emergency, predominantly on climate change and progressively on biodiversity loss. But this rendezvous between the biophysical and financial worlds is not that intuitive. In this paper, we will first propose a conceptual dual framework to define what are the overarching relationships between these two domains: finance and environment. Based on the notions of ‘impact’ and ‘risk’, this approach will help us to articulate the different approaches that currently co-exist at the interface between these two worlds, with sometimes opposite understandings, philosophies and goals. Then, we will step back from the current stirring at the edge of these two domains, to unfold how finance, climate change and biodiversity became associated in the frame of what is now often called “sustainable finance”.

We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm’s exposure to environmental risk and those that enhance its perceived environmental friendliness (“greenness”). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors.

This chapter provides an overview of the state of the literature on investment practices that. consider environmental, social and governance (ESG) factors. Such investing practices are commonly known as socially responsible investing (SRI), impact investing or sustainable investing. The literature review includes 96 journal articles on ESG investing published between 2009 and May 2021. The review shows that ESG investing research is growing, multidisciplinary, dominated by studies adopting quantitative (mainly archival) methods and concentrated in the developed markets (particularly North America and Europe). The four broad strands of research identified in the ESG investing literature are (1) investor behaviour in relation to ESG investing, (2) ESG investing strategies, (3) performance and characteristics of ESG-focused funds and portfolios and (4) ESG ratings. We show several ways future research on ESG investing could be directed towards developing the knowledge necessary to steer investing and corporate practices to support planetary sustainability.

We study the relative effectiveness of exit (divestment and boycott) and voice (engagement) strategies in promoting socially desirable outcomes in companies that generate externalities. We show that if the majority of investors are socially responsible, voice achieves the socially desirable outcome, while exit does not. If the majority of investors are purely selfish, exit is a more effective strategy, but neither strategy generally achieves the first best. We also show that individual incentives to join an exit strategy are not aligned with social incentives, and hence exit can lead to a worse outcome than if all individuals are purely selfish.

This paper estimates the effect of sustainable shareholder engagement on firm’s investments. We study the real estate industry where investments are sporadic and occur following depreciation cycles. SEC restrictions (rule 240.14a-8) on shareholder proposals, in combination with the asset depreciation cycles, create random variation enabling us to identify firms’ sustainable investment decisions. Using unique micro-data tracking investments in all public US commercial real estate properties over the past two decades, we find that sustainable engagement effectively steers firms to initiate tangible and long-lasting sustainable retrofits. However, engagement is ineffective or impairs such investments when it does not coincide with reinvestment periods, or investors vote down the proposal. Institutional subscribers to the NBER working paper series, and residents of developing countries may

We analyze an extensive proprietary database of corporate social responsibility engagements with U.S. public companies from 1999-2009. Engagements address environmental, social, and governance concerns. Successful (unsuccessful) engagements are followed by positive (zero) abnormal returns. Companies with inferior governance and socially conscious institutional investors are more likely to be engaged. Success in engagements is more probable if the engaged firm has reputational concerns and higher capacity to implement changes. Collaboration among activists is instrumental in increasing the success rate of environmental/social engagements. After successful engagements, particularly on environmental/social issues, companies experience improved accounting performance and governance and increased institutional ownership.

We report results from a pre-registered field experiment about the impact of index provider engagement on corporate climate policy. A randomly chosen group of 300 out of 1227 international companies received a letter from an index provider, encouraging the company to commit to setting a science-based climate target to remain included in its climate transition benchmark indices. After one year, we observed a significant effect: 21.0% of treated companies have committed, vs. 15.7% in the control group. This suggests that engagement by financial institutions can affect corporate policies when a feasible request is combined with a credible threat of exit.

We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an on average negative market reaction; (ii) a less negative market reaction for firms having higher pre-directive nonfinancial performance; and (iii) a less negative reaction for firms having higher pre-directive nonfinancial disclosure levels. Results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Overall, the results are consistent with the equity market perceiving that this disclosure regulation of nonfinancial information would lead to net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure.

Navigating the complex landscape of corporate climate disclosures and their real impacts is crucial for managing climate-related financial risks. However, current disclosures oftentimes suffer from imprecision, inaccuracy, and greenwashing. We introduce climatebertcti, a deep learning algorithm, to identify climate-related cheap talk in MSCI World index firms’ annual reports. We find that only targeted climate engagement is associated with less cheap talk. Voluntary climate disclosures are associated with more cheap talk. Moreover, cheap talk correlates with increased negative news coverage and higher emissions growth. Hence, cheap talk helps assess climate initiatives’ effectiveness and anticipate reputation and transition risk exposure.

To the extent that firms don’t internalise the negative externalities of their CO2 emissions, government intervention is needed to curb global warming. We study the equilibrium interaction between firms, which can invest in green technologies, and government, which can imposeemission caps but has limited commitment power. Two types of equilibria can arise: If firms anticipate caps, they invest in green technologies. These investments have positive spillover effects, lowering the aggregate cost of emission reductions for all firms, thus making the government willing to cap emissions. If firms anticipate no caps, they don’t invest in green technologies, and the government finds it too costly to cap emissions. A large fund, engaging with firms’ management to foster investment in green technologies, can tilt equilibrium towards emission caps.

Navigating the complex landscape of corporate climate disclosures and their real impacts is crucial for managing climate-related financial risks. However, current disclosures oftentimes suffer from imprecision, inaccuracy, and greenwashing. We introduce climatebertcti, a deep learning algorithm, to identify climate-related cheap talk in MSCI World index firms’ annual reports. We find that only targeted climate engagement is associated with less cheap talk. Voluntary climate disclosures are associated with more cheap talk. Moreover, cheap talk correlates with increased negative news coverage and higher emissions growth. Hence, cheap talk helps assess climate initiatives’ effectiveness and anticipate reputation and transition risk exposure.

This paper explores potential greenwashing in the responsible investing (RI) landscape. We survey retail global equity funds in Australasia, our analysis has three components. First, we elicit how and why asset managers integrate ESG information into investment decisions showing that RI approaches were mainly motivated by performance and fund flows, or value, rather than ethical values. Second, we compared responses to the portfolio holdings data and found, contrary to our hypothesis, portfolio carbon intensity was not significantly lower for members of a climate initiative, for those that prioritised climate change themes or engaged in a decarbonisation strategy – with these results robust after controlling for ‘engagement’ strategies. The divergence between words and actions appears to be consistent with greenwashing funds (‘lemons’). Third, we compare ESG-named and non-ESG-named funds, for respondents and the full sample, to find that, contrary to our hypothesis, they had similar emissions intensities and ESG performance.

We show how investors with pro-environmental preferences and who penalize revelations of past environmental controversies impact corporate greenwashing practices. Through a dynamic equilibrium model with information asymmetry, we characterize firms’ optimal environmental communication, emissions reduction, and greenwashing policies, and we explain the forces driving them. Notably, under a condition that we explicitly characterize, companies greenwash to inflate their environmental score above their fundamental environmental value, with an effort and impact increasing with investors’ pro-environmental preferences. However, investment decisions that penalize greenwashing, policies increasing transparency, and environment-related technological innovation contribute to mitigating corporate greenwashing. We provide empirical support for our results.

This paper proposes a conditional asset pricing model that integrates ESG demand and supply dynamics. Shocks in the demand for sustainable investing represent a novel risk source, characterized by diminishing marginal utility and positive premium. Green assets exhibit positive exposure to ESG demand shocks, hence commanding higher premia. Conversely, time-varying convenience yield leads to lower expected returns for green assets. Moreover, ESG demand shocks have positive contemporaneous effects on unexpected returns, contributing to large positive payoffs in the green-minus-brown portfolio over extended horizons. The model predictions align closely with evidence on return spreads between green and brown assets, further reinforcing the apparent gap between realized and expected spreads.

We study the impact of green investors on stock prices in a dynamic equilibrium model where investors are green, passive or active. Green investors track an index that progressively excludes the stocks of the brownest firms; passive investors hold a value-weighted index of all stocks; and active investors hold a mean-variance efficient portfolio of all stocks. Contrary to the literature, we find large drops in the stock prices of the brownest firms and moderate increases for greener firms. These effects occur primarily upon the announcement of the green index’s formation and continue during the exclusion phase. The announcement effects imply a first-mover advantage to early adopters of decarbonisation strategies. Institutional subscribers to the NBER working paper series, and residents of developing countries may

The change in the cost of capital that results from a divestiture strategy can be closely approximated as a simple function of three parameters: (1) the fraction of socially conscious capital, (2) the fraction of targeted firms in the economy and (3) the return correlation between the targeted firms and the rest of the stock market. When calibrated to current data, we demonstrate that the impact on the cost of capital is too small to meaningfully affect real investment decisions. We empirically corroborate these small estimates by studying firm changes in ESG status and are unable to detect an impact of ESG divestiture strategies on cost of capital of treated firms. Our results suggest that to have impact, instead of divesting, socially conscious investors should invest and exercise their rights of control to change corporate policy.

I show that the recent returns to ESG investing are strongly driven by price impact from flows towards ESG portfolios. Using data on trades, I estimate the market’s ability to accommodate ESG flows, which is given by the elasticity of substitution between ESG and other stocks. I show that every dollar flowing towards a representative ESG portfolio increases the market value of ESG stocks by $0.8. The growing institutional flows into the ESG portfolio are the main driver of ESG returns and have caused an annual flow-driven return of 1.9%. In the absence of flows, ESG stocks would not have outperformed the market from 2012 to 2023.

Strong regulatory actions are needed to combat climate change, but climate policy uncertainty makes it difficult for investors to quantify the impact of future climate regulation. We show that such uncertainty is priced in the option market. The cost of option protection against downside tail risks is larger for firms with more carbon-intense business models. For carbon-intense firms, the cost of protection against downside tail risk is magnified at times when the public’s attention to climate change spikes, and it decreased after the election of climate change skeptic President Trump.

Most developed countries will be facing severe public budget constraints. We derive a formula for how extraction or use of nonrenewable resources should be taxed when governments need to collect commodity tax revenues. Moreover, we show how it can be directly used to indicate how carbon taxation should be increased in the presence of public-revenue needs. The obtained tax is an augmented, dynamic version of the standard Ramsey taxation rule. It distorts developed reserves, which are reduced, and their depletion, which is slowed down, going further in the direction prescribed for the resolution of the climate externality. We present a simple calibrated application of our results to illustrate how the carbon taxation of oil should be augmented, and the incidence on oil use and tax revenues.

I examine corporate green bonds, whose proceeds finance climate-friendly projects. These bonds have become more prevalent over time, especially in industries where the environment is financially material to firm operations. I document that investors respond positively to the issuance announcement, a response that is stronger for first-time issuers and bonds certified by third parties. The issuers improve their environmental performance post issuance (i.e., higher environmental ratings and lower CO2 emissions), and experience an increase in ownership by long-term and green investors. Overall, the findings are consistent with a signaling argument—by issuing green bonds, companies credibly signal their commitment towards the environment.

We examine the novel phenomenon of sustainability-linked bonds (SLBs). These bonds’ coupon is contingent on the issuer achieving a predetermined sustainability performance target. We estimate the yield differential between SLBs and non-sustainable counter-factuals by matching bonds from the same issuer. Our results suggest that issuing an SLB yields an average premium of -9 basis points on the yield at issue compared to a conventional bond, although this premium decreased over time. On average, the savings from this reduction in the cost of debt exceed the maximum potential penalty that issuers need to pay in case of failure of the sustainability performance target. This suggests that SLB issuers can benefit from a ’free lunch’, i.e. a financial benefit despite not reaching the target. Investigating the drivers of the premium, we show that there is no clear empirical relationship between the yield at issue and the coupon step-up agreement of SLBs. Instead, an issuer’s first SLB seems to command a significantly larger premium, suggesting that especially the first SLB is seen by investors as a credible signal of a company’s commitment to sustainability.

We develop a theory of optimal security design for financing green investments in the presence of greenwashing. Green outcomes are uncertain and can be obtained through the implementation of tangible projects and/or intangible effort-based strategies. When manipulation is not possible, the optimal contract takes the form of an outcome-based security design, similar to a sustainability-linked bond (SLB), with a payoff that is contingent on green outcomes. When manipulation is costless, the optimal contract takes the form of a project-based security design, similar to a green bond (GB), with a payoff that depends on the implementation of green projects. When green outcomes can be manipulated at some cost, the optimal contract is a hybrid which incorporates both an outcome-contingency (like an SLBs) and a project-contingency (like a GB). The model rationalizes several empirical facts.

We use administrative credit registry data from Europe to study the impact of voluntary lender net zero commitments. We have two sets of findings. First, we find no evidence of lender divestment. Net zero banks neither reduce credit supply to the sectors they target for decarbonization nor do they increase financing for renewables projects. Second, we find no evidence of reduced financed emissions through engagement. Borrowers of net zero banks are not more likely to set decarbonization targets or reduce their verified emissions. Our estimates rule out even moderate-sized effects. These results highlight the limits of voluntary commitments for decarbonization.

Do climate-oriented regulatory policies affect the flow of credit towards polluting corporations? We match loan-level data to firm-level greenhouse gas emissions to assess the impact of the Paris Agreement. We find that, following this agreement, European banks reallocated credit away from polluting firms. In the aftermath of President Trump’s 2017 announcement that the United States was withdrawing from the Paris Agreement, lending by European banks to polluting firms in the United States decreased even further in relative terms. It follows that green regulatory initiatives in banking can have a significant impact combating climate change.

In this paper, I investigate whether and how banks align green words with deeds in terms of credit allocation across more or less carbon-intensive industries in France. I use a rich dataset of bank credit exposures across some fifty industries and two size classes of borrowing firms for the main banking groups operating in France, which I merge with information on industries’ greenhouse gas emission intensities and a score for banks’ self-reported climate-related commitments over 2010-2017. I find evidence that higher levels of self-reported climate commitments by banks are associated with less lending to large corporates in the five brownest industries. However, lending to SMEs across more or less carbon-intensive industries remained unrelated to banks’ commitments to green their business. Since SMEs are not required to report on their carbon emissions, while large firms are, these findings suggest that devising an appropriate carbon reporting framework for small firms is likely to enhance the decarbonization of bank lending.

Do banks price the risk of stranded fossil fuel reserves? To address this question, we hand collect global data on corporate fossil fuel reserves from 2002 to 2016, match it with syndicated loans, and subsequently compare the loan rate charged to fossil fuel firms — along their climate policy exposure — to other firms. We find that banks price climate policy exposure, especially after 2015. We also uncover that our main effect further increases for loans with longer maturity, that loan size to fossil fuel firms increases, and that “Green” banks also charge higher loan rates to fossil fuel firms.

We investigate whether and how the environmental consciousness (greenness for short) of firms and banks is reflected in the pricing of bank credit. Using a large international sample of syndicated loans over the period 2011-2019, we find that green banks indeed reward firms for being green in the form of cheaper loans–however, only after the ratification of the Paris Agreement in 2015. Such loans are also more likely term loans, with fewer covenants and reflect firms’ project choices. Thus, we find that environmental attitudes matter “when green meets green.”

Can a self-proclaimed Socially Responsible Fund (SRF) whose objective is to maximize assets under management improve social welfare? We study this question in a general equilibrium two-sector model incorporating financial intermediation, negative externalities due to firms’ emissions, and investors’ social preferences, which are of two kinds: (a) private benefits from investing in low-emission footprint equities (“value alignment”), and (b) utility from causing improvement in social welfare (“impact”). We analyze the equilibrium size and strategies of the SRF. When investors with value-alignment preferences are in large proportion in the population we show that the SRF invests in the low-emission sector, while requiring invested companies to use low-emission suppliers. This “Scope 3 strategy” attracts both types of investors and indirectly induces lower emissions by acting on the supply-chain. In some other scenarios, the SRF adopts a dual-fund strategy that separates the two types of investors: One fund, focussed on the clean sector, caters to investors with value-alignment preferences, while another, which invests in the higher-emission sector, appeals to impact investors by imposing reduced direct emissions to invested companies.

We characterize the conditions under which a socially responsible (SR) fund induces firms to reduce externalities, even when profit-seeking capital is in perfectly elastic supply. Such impact requires that the SR fund’s mandate permits the fund to trade off reduced financial performance against reductions in social costs – relative to the counterfactual in which the fund does not invest in a given firm. Based on such an impact mandate, we derive a micro-founded investment criterion, the social profitability index (SPI), which characterizes the optimal ranking of impact investments when SR capital is scarce. If firms face binding financial constraints, the optimal way to achieve impact is by enabling a scale increase for clean production. In this case, SR and profit-seeking capital are complementary: Surplus is higher when both investor types are present.

Portfolio allocation decisions increasingly incorporate social values. We develop a tractable framework to study how competition between investors to own socially valuable assets affects social welfare. Relative to the most common social-investing strategies, we identify alternative strategies that result in higher impact and higher financial returns. We identify strategies for investors to have impact when impact is difficult to measure. From the firm perspective, increasing profitability can have a greater impact than directly increasing social value. We present new empirical evidence on the social preferences of investors that demonstrates the practical relevance of our theory.

We study the optimal investment strategy for a responsible investor concerned with financial returns and societal impact. Unconditional exclusion of “brown” stocks starves them of capital, reducing externalities. A conditional strategy — buying a brown firm if it has taken a corrective action — allows it to expand, but incentivizes reform and yields the investor profits. A lower concern for profits makes an investor less likely to condition; thus, a greater concern for externalities may reduce effectiveness in curbing externalities. We derive novel implications for how responsible investing strategies are affected by ES disclosure, ES ratings, arbitrageurs, and fiduciary duty.

We develop a new measure of impact elasticity: the change in a firm’s environmental impact due to a change in its cost of capital. We find that reducing green firms’ financing costs leads to minimal impact changes, while increasing brown firms’ financing costs causes significant negative impact changes. Thus, sustainable investing strategies that shift capital from brown to green firms contain a counterproductive channel that makes brown firms more brown without making green firms more green. A mistaken focus on textit{percentage} reductions in emissions rewards already-green firms for trivial reductions in emissions and gives brown firms weak incentives to improve.

To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play less of a role. Socially responsible investors in our sample expect to earn lower returns on SRI funds than on conventional funds and pay higher management fees. This suggests that investors are willing to forgo financial performance in order to invest in accordance with their social preferences.

Examining a shock to the salience of the sustainability of the US mutual fund market, we present causal evidence that investors marketwide value sustainability. Being categorized as low sustainability resulted in net outflows of more than $12 billion while being categorized as high sustainability led to net inflows of more than $24 billion. Experimental evidence suggests that sustainability is viewed as positively predicting future performance, but we do not find evidence that high sustainability funds outperform low sustainability funds. The evidence is consistent with positive affect influencing expectations of sustainable fund performance and non-pecuniary motives influencing investment decisions.

We characterize investors’ moral preferences in a parsimonious experimental setting, where we auction stocks with various ethical features. We find strong evidence that investors seek to align their investments with their social values (“value alignment”), and find no evidence of behavior driven by the social impact of investment decisions (“impact-seeking preferences'”). First, the willingness to pay (WTP) for a stock is a linear function of corporate externalities, and is symmetric for positive or negative externalities. Second, this WTP does not change when corporate externalities are made contingent on investors buying the auctioned stock. Our results are thus compatible with a utility-maximization model where non-pecuniary benefits of firms’ externalities only accrue through stock ownership, not through the actual impact of investment decisions. Finally, non-pecuniary preferences are linear and additive: willingness to pay for social externalities is proportional to the expected sum of charity transfers made by firms (even if some of these transfers are negative).

We assess how investors’ willingness-to-pay (WTP) for sustainable investments responds to the social impact of those investments, using a framed field experiment. While investors have a substantial WTP for sustainable investments, they do not pay significantly more for more impact. This also holds for dedicated impact investors. When investors compare several sustainable investments, their WTP responds to relative but not to absolute levels of impact. Regardless of investments’ impact, investors experience positive emotions when choosing sustainable investments. Our findings suggest that the WTP for sustainable investments is primarily driven by an emotional rather than a calculative valuation of impact.

The design and conduct of climate change policy necessarily confronts uncertainty along multiple fronts. We explore the consequences of ambiguity over various sources and configurations of models that impact how economic opportunities could be damaged in the future. We appeal to decision theory under risk, model ambiguity and misspecification concerns to provide an economically motivated approach to uncertainty quantification. We show how this approach reduces the many facets of uncertainty into a low dimensional characterization that depends on the uncertainty aversion of a decision-maker or fictitious social planner. In our computations, we take inventory of three alternative channels of uncertainty and provide a novel way to assess them. These include i) carbon dynamics that capture how carbon emissions impact atmospheric carbon in future time periods; ii) temperature dynamics that depict how atmospheric carbon alters temperature in future time periods; iii) damage functions that quantify how temperature changes diminish economic opportunities. We appeal to geoscientific modeling to quantify the first two channels. We show how these uncertainty sources interact for a social planner looking to design a prudent approach to the social pricing of carbon emissions.

The financial system could help achieve the global climate targets by aligning investments to sustainability. However, investors are largely exposed to carbon-intensive assets that could become stranded, thus delaying the low-carbon transition and bringing new sources of risk for financial stability, i.e., climate-related financial risks. Here, we discuss climate-related financial risks, the challenges they pose to traditional economic and financial risk assessment, and the implications for the implementation and feasibility of climate policies. We then present science-based approaches that introduce forward-looking climate risks and their deep uncertainty in financial risk management (e.g., via the climate value at risk, climate spread, climate stress-test). Finally, we present results of applications aimed at pricing climate risks in investors’ portfolios and calculating the largest losses that could lead to systemic risk, in collaboration with leading financial institutions.

According to our survey about climate risk perceptions, institutional investors believe climate risks have financial implications for their portfolio firms and that these risks, particularly regulatory risks, already have begun to materialize. Many of the investors, especially the long-term, larger, and ESG-oriented ones, consider risk management and engagement, rather than divestment, to be the better approach for addressing climate risks. Although surveyed investors believe that some equity valuations do not fully reflect climate risks, their perceived overvaluations are not large.

We propose and implement a procedure to dynamically hedge climate change risk. To create our hedge target, we extract innovations in climate news series that we construct through textual analysis of high-dimensional data on newspaper coverage of climate change. We then use a mimicking-portfolio approach to build climate change hedge portfolios using a large panel of equity returns. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. The resulting hedge portfolios outperform alternative hedging strategies based primarily on industry tilts. We discuss multiple directions for future research on financial approaches to managing climate risk.

This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: KLD, Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated.

The explosion in ESG research has led to a strong reliance on ESG rating providers. We document widespread changes to the historical ratings of a key rating provider, Refinitiv ESG (formerly ASSET4). Depending on whether the original or rewritten data are used, ESG-based classifications of firms into ESG quantiles and tests that relate ESG scores to returns change. While there is a positive link between ESG scores and firms’ stock market performance in the rewritten data, we fail to observe such a relationship in the initial data. The ESG data rewriting is an ongoing rather than a one-off phenomenon.

We propose a theory in which each stock’s environmental, social, and governance (ESG) score plays two roles: 1) providing information about firm fundamentals and 2) affecting investor preferences. The solution to the investor’s portfolio problem is characterized by an ESG-efficient frontier, showing the highest attainable Sharpe ratio for each ESG level. The corresponding portfolios satisfy four-fund separation. Equilibrium asset prices are determined by an ESG-adjusted capital asset pricing model, showing when ESG increases or lowers the required return. Combining several large data sets, we compute the empirical ESG-efficient frontier and show the costs and benefits of responsible investing. Finally, we test our theory’s predictions using commercial ESG measures, governance, sin stocks, and carbon emissions.

This paper shows how sustainable investing—through the joint practice of exclusionary screening and environmental, social, and governance (ESG) integration—affects asset returns. I develop an asset pricing model with partial segmentation and heterogeneous preferences. I characterize two exclusion premia generalizing Merton’s (1987) premium on neglected stocks and a taste premium that clarifies the relationship between ESG and financial performance. Focusing on U.S. stocks, I estimate the model by applying it to sin stocks as excluded assets and using the holdings of green funds to proxy for environmental integration. The average annual exclusion effect is 2.79% for the period 1999–2019. Although the annual taste effect ranges from −1.12% to +0.14% across industries for 2007–2019, the taste effect spread between the top and bottom terciles of companies within each industry can exceed 2% per year. Finally, I estimate and explain the dynamics of these premia.

We study whether carbon emissions affect the cross-section of U.S. stock returns. We find that stocks of firms with higher total CO2 emissions (and changes in emissions) earn higher returns, controlling for size, book-to-market, and other return predictors. We cannot explain this carbon premium through differences in unexpected profitability or other known risk factors. We also find that institutional investors implement exclusionary screening based on direct emission intensity (the ratio of total emissions to sales) in a few salient industries. Overall, our results are consistent with an interpretation that investors are already demanding compensation for their exposure to carbon emission risk.

Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the “greenium” widened, and U.S. green stocks outperformed brown as climate concerns strengthened. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks’ recent underperformance.

We provide first-time evidence on whether market-wide physical or transition climate, risks are priced in U.S. stocks. Textual and narrative analysis of Reuters climate-change, news over 1 January 2000-31 December 2018, uncovers four novel risk factors related to natural, disasters, global warming, international summits, and U.S. climate policy, respectively. Only the climate-policy factor is priced, especially post-2012. The documented risk premium, is consistent with investors hedging the imminent transition risks from government, intervention, rather than the direct risks from climate change itself.

This paper analyzes the asset pricing and portfolio implications of an important barrier to sustainable investing—uncertainty about the corporate ESG profile. In equilibrium, the market premium increases and demand for stocks declines under ESG uncertainty. In addition, the CAPM alpha and effective beta both rise with ESG uncertainty and the negative ESG-alpha relation weakens. Employing the standard deviation of ESG ratings from six major providers as a proxy for ESG uncertainty, we provide supporting evidence for the model predictions. Our findings help reconcile the mixed evidence on the cross-sectional ESG-alpha relation and suggest that ESG uncertainty affects the risk-return trade-off, social impact, and economic welfare.

This paper shows how green investing spurs companies to mitigate their carbon emissions by raising the cost of capital of the most carbon-intensive companies. Companies’ emissions decrease when the proportion of green investors and their sensitivity to climate externalities increase. We show that the impact of green investors primarily governs companies’ long-term emissions. Companies are further incentivized to reduce their emissions when green investors anticipate tighter climate regulations and climate-related technological innovations. However, heightened uncertainty regarding future climate risks alleviates green investors’ pressure on the cost of capital of companies and pushes them to increase their emissions. We provide empirical evidence supporting our results by focusing on United States stocks between 2004 and 2018 and using green fund holdings as a proxy for green investors’ beliefs. When the fraction of assets managed by green investors doubles, companies’ carbon intensity drops by 4.9% over one year; when climate uncertainty doubles, companies’ carbon intensity increases by 6.7% the following year.

We empirically test the prediction of Pastor et al. (2021) that green firms outperform brown firms when concerns about climate change increase unexpectedly, using datafor S&P500 companies from January 2010 to June 2018. To capture unexpected increases in climate change concerns, we construct a daily Media Climate Change Concerns index using news about climate change published by major U.S. newspapers and newswires. We find that on days with an unexpected increase in climate change concerns, the green firms’ stock prices tend to increase, whereas brown firms’ prices decrease. Furthermore, using topic modeling, we conclude that this effect holds for concerns about both transition and physical climate change risk. Finally, we decompose returns into cash flow and discount rate news components and find that an unexpected increase in climate change concerns is associated with an increase (decrease) in the discount rate of brown (green) firms.

We model investing that considers environmental, social, and governance (ESG) criteria. In equilibrium, green assets have low expected returns because investors enjoy holding them and because green assets hedge climate risk. Green assets nevertheless outperform when positive shocks hit the ESG factor, which captures shifts in customers’ tastes for green products and investors’ tastes for green holdings. The ESG factor and the market portfolio price assets in a two-factor model. The ESG investment industry is largest when investors’ ESG preferences differ most. Sustainable investing produces positive social impact by making firms greener and by shifting real investment toward green firms.