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  5. Corporate Finance: ESG and Sustainable Finance
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Corporate Finance: ESG and Sustainable Finance

Paper Session

Sunday, Jan. 5, 2025 8:00 AM - 10:00 AM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 9
Hosted By: American Finance Association
  • Adair Morse, University of California-Berkeley

Green Revenues

Johannes Klausmann
,
University of Virginia
Philipp Krueger
,
Swiss Finance Institute - University of Geneva
Pedro Matos
,
University of Virginia

Abstract

Using a novel measure of a firm's green revenues, this paper sizes up the green economy, shedding light on the drivers behind global public firms increasing business activities that help with the transition to a low-carbon and more environmentally sustainable economy. We document that the green economy grew at an accelerated pace after the Paris Agreement. We investigate three potential channels contributing to this transition. Firstly, we examine whether corporate green innovation capabilities translate into tangible green revenues. Secondly, we assess how increased regulatory actions impact firms' efforts to increase their green business activities. Thirdly, we explore the role of institutional investors in driving this green transition. Since it is unclear whether more green business activities create value to shareholders, we also explore how the stock market perceives firms with higher green revenues. Our findings indicate that the green shift is driven by innovative US firms converting green patents into actual revenues from green products and services. Additionally, we find that several regulatory initiatives have led to an acceleration in the growth of the green economy in Europe. While responsible institutional investors are more likely to be invested in firms with higher green revenues, we do not find their presence to be associated with the post-Paris shift to a greener economy. Finally, when we examine the stock returns of firms with high green revenues, we find only modest evidence of a green alpha which seems to be concentrated mostly in US stocks in the post-Paris period.

Green Products

Wan-chien Chiu
,
National Tsing Hua University
Po-hsuan Hsu
,
National Tsing Hua University
Kai Li
,
University of British Columbia
Joy Tianjiao Tong
,
University of Western Ontario

Abstract

We apply a novel text-based classification procedure to identify green marks in the USPTO trademark dataset and study the development of environmentally friendly products and services in the U.S. economy over the past forty years. Given the “use in commerce” requirement for trademarks, our data are in a unique position to capture newly commercialized green products and, thus, firms’ commitment to environmental protection and sustainability. We first show that manufacturing, energy, and services are the top three sectors in developing green products in the U.S. economy. We next show that firms with more green products are associated with higher environmental ratings and lower greenhouse gas emissions. Moreover, more green products are associated with greater future sales growth and higher firm value. Importantly, those associations are more pronounced among firms with broader product market scope and firms facing fewer competitive threats. Leveraging granular textual data in a mark’s registration form, we show that green products are significantly more value-enhancing when they are a firm’s core business, are not greenfield, or complement other products. As far as we are aware, we are the first to shed light on whether and how green products help increase sales and firm value. Finally, we provide causal evidence that firms launch green products in response to natural disasters in neighboring counties or their peers’ environmental scandals. We conclude that firms’ development of green products and services is associated with tangible real environmental outcomes and better financial performance.

Environmental Regulation, Pollution, and Shareholder Wealth

Seungho Choi
,
Hanyang University
Ross Levine
,
Stanford University
Raphael Park
,
University of Technology Sydney
Simon Xu
,
Harvard University

Abstract

This paper investigates the stock market’s reaction to changes in the interaction between local environmental regulations and a firm’s polluting behavior. Our identification strategy uses county-level ozone noncompliance designations induced by discrete policy changes in the National Ambient Air Quality Standards (NAAQS) as a source of exogenous variation in local regulatory stringency. Given the exogenous revision in the NAAQS threshold, many counties suddenly found themselves in nonattainment relative to the year prior, even if their ozone emissions did not change by all that much. Therefore, the switch to nonattainment is triggered by the lowering of the NAAQS threshold that defines noncompliance, rather than by rising ozone emissions. On average, the market responds positively to firms exposed to noncompliance designations compared to non-exposed firms. In the cross-section, firms’ value initially increases with noncompliance exposure but declines at higher levels. Examining the mechanisms reveals that this nonlinear variation arises from the offsetting effects of noncompliance exposure on incumbent firms, encompassing a trade-off between the benefits of competitive advantages and the costs of regulatory compliance. Furthermore, short-term market reactions to noncompliance designations are consistent with their long-term effects on firms’ accounting performance. Overall, the evidence suggests that the stock market internalizes the perceived benefits and costs of local environmental regulation, thereby influencing stock market valuations.

Pricing the Priceless: The Financing Cost of Biodiversity Conservation

Fukang Chen
,
Renmin University of China
Minhao Chen
,
Renmin University of China
Lin William Cong
,
Cornell University
Haoyu Gao
,
Renmin University of China
Jacopo Ponticelli
,
Northwestern University

Abstract

Biodiversity conservation incurs substantial economic costs. We investigate how financial markets price the risks these costs induce, focusing on the "Green Shield Action," a major regulatory initiative launched in China in 2017 to enforce biodiversity preservation rules in national nature reserves. While improving biodiversity, the initiative led to significant increases in bond yields for municipalities with these reserves, effectively raising the cost of public capital. The effects are driven by increased fiscal risk for local governments due to anticipated transition costs from eradicating illegal economic activities within reserves and additional public spending on biodiversity. Investors show little non-financial consideration toward efforts counteracting biodiversity loss.

Discussant(s)
Andreas Hoepner
,
University College Dublin
Moritz Wiedemann
,
Rotterdam School of Management
Ian Appel
,
University of Virginia
Laura Starks
,
University of Texas-Austin
JEL Classifications
  • G3 - Corporate Finance and Governance