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  5. How Firms Manage Climate Change
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How Firms Manage Climate Change

Paper Session

Friday, Jan. 3, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 8
Hosted By: American Finance Association
  • Kilian Huber, University of Chicago

Roy Sorting: Climate and Status Quo Strategies

Thomas Cauthorn
,
University of Kassel
Samuel Drempetic
,
University of Kassel
Andreas Hoepner
,
University College Dublin
Christian Klein
,
University of Kassel
Adair Morse
,
University of California-Berkeley

Abstract

We posit that firms enact competitive sorting to value-optimizing strategies towards transition or status quo opportunities, drawing inspiration from Roy (1951) – where the best fishers fish, and the best hunters hunt. We apply latent variable techniques from Heckman, Stixrud, Urzua (2006) using a novel dataset of active manager edits of ESG fundamentals, focusing on the industrial base economy sectors. We find 52 (24) and 83 (77) basis point revaluations in energy and mining respectively, when firms competitively sort toward transition (status quo) growth strategies. For industrials and basic materials, we only find a positive return impact in sorting toward status quo opportunities. Our effects largely go away in countries with high environmental stringency, reflecting perhaps a pooling toward transition investment induced by policy inhibiting the status quo.

On the Importance of Assurance in Carbon Accounting

Florian Berg
,
Massachusetts Institute of Technology
Roberto Rigobon
,
Massachusetts Institute of Technology
Jaime Oliver
,
Clarity AI

Abstract

Firms that obtain assurance for their carbon accounting report on average a 9.5% higher
carbon intensity than their peers. When controlling for assurance, we do not find evidence
that SBTi target-setters reduce their future emissions. Instead, firms that obtain assurance
reduce their future carbon intensity by 3.3%. 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 reductions. It also calls for mandatory
assurance when carbon reporting is mandatory and when reported emissions are generally
relied upon in regulation.

Temperature, Adaptation, and Local Industry Concentration

Jacopo Ponticelli
,
Northwestern University
Qiping Xu
,
University of Illinois
Stefan Zeume
,
University of Illinois

Abstract

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. In the short-run, high-temperature shocks significantly increase energy costs and lower productivity for small plants, while large plants are mostly unaffected. In the long-run, commuting zones with higher increases in temperatures between the 1980s and the 2010s experience a decline in the number of plants and higher local labor market concentration. Differences in costs per unit of energy, managerial skills, and -- to a more limited extent -- hedging across locations contribute to explaining why large firms are better able to adapt to climate change.

Discussant(s)
Lauren Cohen
,
Harvard University
Laura Starks
,
University of Texas-Austin
Shan Ge
,
New York University
JEL Classifications
  • G3 - Corporate Finance and Governance