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Sustainability and Finance

Paper Session

Friday, Jan. 5, 2024 8:00 AM - 10:00 AM (CST)

Marriott Rivercenter, Grand Ballroom Salon K, & L
Hosted By: American Finance Association
  • Chair: Malcolm Baker, Harvard University

Carbon Emissions and Shareholder Value: Causal Evidence from the U.S. Power Utilities

Mayank Kumar
,
University of Michigan
Amiyatosh Purnanandam
,
University of Michigan

Abstract

We establish a causal link between carbon emissions and shareholder value using the passage of the Regional Greenhouse Gas Initiative (RGGI) that imposed a cap-and-trade policy for carbon emission on electric utilities in several Northeastern and Mid-Atlantic states. The regulation was successful in significantly bringing down the level of CO2 emission from plants located in the RGGI states compared to unaffected plants. The affected plant’s revenue and profitability decreased after the RGGI as they transitioned to cleaner technology. Publicly traded power utility companies in the affected states experienced a drop in their profitability as well. Yet, they had a higher market-to-book ratio after the implementation of the initiative. Increase in value came from an increase in the expected future cash flows of the treated firms and increasing demand of these stocks by institutional funds focused on environmental goals. Our results show that short-term focus on profitability may be a significant impediment to carbon transition.

Are All ESG Funds Created Equal? Only Some Funds Are Committed

Michelle Lowry
,
Drexel University
Pingle Wang
,
University of Texas-Dallas
Kelsey Wei
,
University of Texas-Dallas

Abstract

Although flows into ESG funds have risen dramatically, it remains unclear whether these funds perceive ESG to be a value driver, and relatedly, whether they strive to influence portfolio firms’ ESG policies. We shed light on this debate by examining the incentives of fund managers. We find that conditional on similarly large ESG investments, ESG funds with higher incentives to engage with portfolio firms– committed ESG funds – adopt longer-term investment strategies, pay more attention to portfolio firms’ ESG risk exposure, and implement less negative screening. Committed funds also demonstrate more discretionary voting on portfolio firms’ ESG proposals and devote more attention to ES issues during the Q&A section of earnings conference calls. Strikingly, only investments by committed ESG funds contribute to real ESG-improvements, and these funds have outperformed other ESG funds on their ESG holdings. Our paper highlights the importance of incentives when assessing the real impacts of sustainable investments.

Green Mandates in Two Sided Markets

Briana Chang
,
University of Wisconsin-Madison
Harrison Hong
,
Columbia University

Abstract

We model the welfare effects of a green mandate in two-sided markets. Examples include banks
and workers conditioning lending or employment on firms cutting emissions, respectively. We
identify three differences when compared to the first-best carbon-emissions tax. First, despite
complementarities, productive firms need not hire productive agents due to abatement costs. Second,
the welfare-maximizing mandate requires firms abate for others, which might be infeasible.
Third, agents without a mandate earn more and productive firms do better than under an emissions
tax. Calibrating to lending and labor markets, a mandate approximates first best only when
firms and agents are relatively homogeneous.

Discussant(s)
Samuel Hartzmark
,
Boston College
Jules Van binsbergen
,
University of Pennsylvania
Deeksha Gupta
,
Johns Hopkins University
JEL Classifications
  • G3 - Corporate Finance and Governance