Environmental Factors in Financial and Real Outcomes
Lightning Round SessionSunday, Jan. 5, 2025 8:00 AM - 10:00 AM (PST)
- Chair: Paige Weber, University of California-Berkeley
Blame It on the Weather: Market Implied Weather Volatility and Firm Performance
Abstract
We introduce a novel measure of weather risk implied from weather options’ contracts. WIVOL captures risks of future temperature oscillations, increasing with climate uncertainty about physical events and regulatory policies. We find that shocks to weather volatility increase the likelihood of unexpected costs: a one-standard deviation change in WIVOL increases quarterly operating costs by 2%, suggesting that firms, on average, do not fully hedge exposures to weather risks. We estimate returns’ exposure to WIVOL innovations and show that more negatively exposed firms are valued at a discount, with investors demanding higher compensations to hold these stocks. Firms’ exposure to local but not foreign WIVOL predicts returns, which confirms the geographic nature of weather risks shocks.Credible Environmental Disclosure and Externalities
Abstract
In recent discourse, prominent institutional investors, including BlackRock and the California Public Employees’ Retirement System (CalPERS), have demanded for enhanced credibility and uniformity in corporate environmental disclosures (see, Marquis et al., 2016; Berg et al., 2022). This advocacy stems from a critical perspective on existing practices in Environmental, Social, and Governance (ESG) reporting, underscored by reporting inconsistencies, selective disclosure practices, an absence of standardization,superficial communications in earning calls and annual reports, and the risk of greenwashing. Against this backdrop of skepticism, many firms are confronted with an imperative question: In situations that amplify corporate environmental risks, how can they effectively convey their commitment to emission reduction and demonstrate long-term pollution abatement capabilities to their stakeholders? The goal of this paper is to examine how an increase in firms’ environmental risk exposure affects credible environmental disclosure.
We study the private and social benefits of firms’ environmental disclosure through clean patent filings. We use plausibly exogenous within-firm variation in EPA sanctions to investigate firm’s private incentives (benefits) to engage in credible environmental disclosure through patenting of abatement technologies. Firms disclose more information on clean innovation in the year following EPA enforcement actions and do so more quickly, consistent with regulatory pressure increasing incentives to signal environmental
information to investors. These results are stronger among firms for whom information disclosure is more important. We also find evidence of positive social benefits through knowledge spillovers along supply chains and local networks that results in emission reduction. We estimate the private benefits and social value of the patent disclosure.
Why do more productive firms pollute less?
Abstract
In this paper, I explore the relationship between firm productivity and CO2e emissions. I estimate productivity using a Cobb's Douglas production function and the control function approach. I show that productivity gains, in the short run, increase emissions but decrease emissions intensity. However, across the cross-section of firms, more productive firms have significantly lower absolute emissions. I further use internet speed as an instrument for firm productivity, and document a causal relationship between firm productivity and absolute emissions. Age of the production capital explains much of this relation. New production capital is more productive and less emitting. Policy makers providing incentives for firms to upgrade production facilities could yield multiple benefits, both for firms and the environment.Do Firm Credit Constraints Impair Climate Policy?
Abstract
This paper shows that firm credit constraints impair climate policy. Empirically, firms with tighter credit constraints, measured by their distance-to-default, exhibit a relatively smaller emission reduction after a carbon taxincrease. We incorporate this channel into a quantitative DSGE model with endogenous credit constraints and carbon taxes. Credit frictions reduce the optimal investment into emission abatement since shareholders are less likely
to receive the payoff from such an investment. We find that carbon taxes consistent with net zero emissions are 24 dollars/ton of carbon larger in the presence of endogenous credit constraints than in an economy without such frictions.
Green Washing in Supply Chains?
Abstract
A particularly pernicious form of green-washing could happen if a firm makes strong commitments about the climate impacts of its own operations while ignoring the environmental harm caused by its suppliers outside of this commitment. Indeed, the United States Environmental Protection Agency estimates that 92% of corporate emissions come from their supply chainsUsing granular firm-level disclosures, we show that suppliers adopt climate action and governance policies following customer firms' adoption of emission reduction targets. Such transmissions are driven by relative bargaining power rather than through a reconfiguration of customers' supply chains. However, we do not find any effect on suppliers' emissions or its leading indicators. This policy-outcome gap suggests a green-washing motive in suppliers’ adoption of climate policies. The policy-outcome gap is lower when suppliers have higher gross margins, and customers can better monitor suppliers. Our results imply that better commercial terms in supply chain contracts can reduce greenwashing concerns.Production Leakage: Evidence from Uncoordinated Environmental Policies
Abstract
This paper documents that international trade may cause uneven distribution of opportunities and costs to countries in face of uncoordinated environmental policies. Specifically, we use exogenous introductions of national carbon taxes to study how local firms react to such shocks, especially when they make sourcing decisions on carbon inputs. Results show that regulatory carbon taxes lead domestic firms to import more carbon products, such as cement, iron and steel, from foreign producers. Firm-level data additionally show that firms will increase their trade shares to foreign suppliers headquartered in pollution haven. Exploiting buyer-supplier relation information, we further find that domestic regulatory carbon taxes do benefit foreign carbon suppliers, helping them to, for example, expanded production scales and improved financial performance. These findings highlight the critical role that international trade play in fulfilling growth, welfare and emission reduction goals of environmental policies.The Effect of Hurricane Otis on Card Payments in Mexico
Abstract
Using weekly cumulative data, we analyze how card payments responded to the inland arrival of the category-five hurricane Otis in the coastal state of Guerrero, Mexico, in late October 2023. We employ an event study design to document heterogenous effects in the two most important municipalities of Guerrero. According to our estimations, Acapulco, the most affected and the most important municipality in card payments, experienced a sharp and a more persistent reduction in the volume and transacted amounts in debit and credit card payments; while Chilpancingo, the second municipality in card payments and close to Acapulco, showed a positive but shorter impact originated by the additional demand possibly coming from Acapulco consumers. Moreover, through the lens of card payments, we enhance our understanding about the most resilient as well as the most vulnerable business retail lines in terms of business continuity located in devastated areas and, in contrast, we identified those, unaffected in their business continuity and in close locations, that were benefited by the demand from affected areas.Nature-Related Risks in Syndicated Lending
Abstract
This study examines how nature-related risks are considered in syndicated lending, showingthat firms highly dependent on ecosystem services (nature–dependent firms) incur
higher financing costs. Using U.S. syndicated loan data and a novel nature dependency
measure, we find a 1% rise in nature dependency results in a 0.21% increase in loan
spreads. Leveraging the 2019 Endangered Species Act (ESA) amendment as an exogenous
shock, we show regulatory relaxation lowered spreads for nature–dependent firms.
Regulating ecosystem services – vital to environmental stability – exert the most influence
on lending costs, suggesting that natural capital risks are increasingly internalized
by financial markets. We also highlight the role of growth potential and refinancing risk
in how banks price nature dependency of borrowers.
Weather Variance Risk Premia
Abstract
We analyze the information content of a variance risk premia extracted from theweather derivatives contracts written on the local temperature of individual U.S. cities.
We term this the Weather Variance Risk Premia (WVRP). By constructing the WVRP
measure from the CME’s weather futures and options contracts, we examine the role of
weather variance risk on bond credit spreads of local corporations and municipalities.
Our results indicate informativeness of weather derivatives market as a local risk factor
priced in the bond returns of local corporations and municipalities. Our results are
robust to controlling state level economic uncertainty measures.
JEL Classifications
- G0 - General