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.
Do Efficient Firms Pollute Less?
Abstract
In this paper I explore whether efficient firms pollute less. More specifically, I explore the relation between firm efficiency and carbon emissions. To quantify efficiency, I estimate firms' total factor productivity following Olley and Pakes (1996). I document that since the early 2000's there has been a trend of a general increase in manufacturing firms' factor productivity and a correlated decrease in their emission intensity (i.e., total direct emissions over total sales). Furthermore, I find that firms with a higher increase in factor productivity have a higher decrease in emissions intensity. A one s.d. increase in factor productivity leads to a 12% decrease in emissions intensity. However, the age of the production capital matters. The effect is stronger for firms whose production capital have been recently upgraded. Thus, firms which endogenously choose to upgrade their production technologies install production capacities which not only are more efficient in terms of production, but also in terms of the climate sustainability of their businesses. My results have implications for the carbon emission regulation for firms which are direct emitters. Regulation which factors in the age of the installed production capital may prove beneficial in reducing the trade-off for firms and lead to more socially desirable outcomes.Do Firm Credit Constraints Impair Climate Policy?
Abstract
This paper shows how credit constraints at the firm level affect the conduct of climate policy. Using a large international panel of listed firms, this paper empirically demonstrates that firms with tighter credit constraints, measured by their distance-to-default, exhibit a smaller emission reduction after a carbon tax increase than their less constrained peers. We incorporate this channel into a quantitative E-DSGE model with credit frictions that depend on structural parameters and give rise to endogenous credit constraints. In the model, increasing the severity of credit frictions is associated with a tightening of credit constraints and an increase of the default probability. We show analytically that more severe credit frictions reduce the incentives to invest into emission abatement, since shareholders are less likely to receive the payoff from such an investment. In a calibrated of the model, we find that increasing the severity of credit frictions to such a degree that the default probability increases by 2 percentage points substantially impairs climate policy. In this case, carbon taxes have to be almost 8 dollars per tonne of carbon larger in order to remain consistent with net zero.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
Abstract
Hurricane Otis with maximum winds of up to 270 km/hr made landfall on the coasts of the state of Guerrero in Mexico between the night of October 24 and the early morning of October 25. Due to the unexpected trajectory and evolution of this meteorological event, which intensified from a tropical storm to a hurricane in a few hours, causing flooding and severe damage to infrastructure. These effects temporarily compromised the operation of electronic payment systems in the affected municipalities. This paper studies the heterogeneous dynamic effects on the volume of card payments in two municipalities of Guerrero: Acapulco and Chilpancingo using a event studies approach. We found that in Acapulco, the volume of these operations fell after the arrival of the hurricane. In contrast, in Chilpancingo, which did not have severe infrastructure impacts, a considerable increase in the volume of card transactions was observed. This paper also analyses the differentiated impacts across these two municipalities, and their recovery through the lens of electronic card payment system.Water Dependency and Cost of Debt
Abstract
The global economy relies heavily on nature, yet it's experiencing an unprecedented loss of natural capital. This poses significant risks to business and is attracting the attention of policymakers, consumers, civil society and financial institutions. Recognizing their central role, the Banks and Biodiversity Initiative highlights the importance of financial institutions in addressing the drivers of natural capital loss. Effectively managing these nature-related financial risks is critical to ensuring both the safety of individual banks and the stability of the broader financial system. This study looks at a firm's specific water dependence as a specific component of climate risk and examines whether it influences the credit risk priced by banks. The importance of water resources to the economy cannot be overstated, as clean freshwater is essential for sustaining life and business. The depletion of water supplies, as indicated by the 2018 National Climate Assessment, poses significant risks. Using data from a newly created UN Environment Programme database and the well-established MSCI water stress score, both of which assess a company's dependence on water resources, we find that banks price water dependence risk into loans. We verify this result by examining whether banks integrate water-related risks into their due diligence processes and further examine whether they price these risks appropriately. The research aims to contribute to better risk management practices in the banking sector, ensuring a more sustainable approach to financing and investment decisions.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