The PRI Academic Seminar Series invites leading ESG experts to present their research to academic scholars and investors.
The aim of the series is to:
- give world thought leaders in responsible investing the opportunity to present their work and obtain valuable feedback
- provide an opportunity to junior scholars to network with the speaker and obtain career advice
- be more inclusive and strengthen our global PRI Academic Network community throughout the year
Witold Henisz, 6 May 2022
Reexamining the Win-Win: Relational Capital, Stakeholder Issue Salience, and the Contingent Benefits of Value Based Environmental, Social and Governance (ESG) Strategies
We integrate value-based and stakeholder strategy theories to analyze the contingent relationship between corporate social performance (CSP) and corporate financial performance (CFP). Our analysis hypothesizes that ex ante investments in environmental, social, and governance (ESG) issues most material to the firm and salient to stakeholders build relational capital that enhances ex post joint value creation and minimizes ex post risks of discord in value appropriation and distribution. We show that investments in material and salient ESG issues are associated with gains in relational capital which, in turn, are associated with revenue and productivity gains that outweigh up-front and ongoing lost revenues, higher costs, and productivity losses. Meanwhile, investments in immaterial ESG issues, although still associated with gains in relational capital, by contrast, are associated with revenue, margin and productivity losses. Attentiveness to materiality is literally the difference between a positive and negative return to stakeholder strategy.
Witold Henisz is the Deloitte & Touche Professor of Management at the Wharton School, University of Pennsylvania.
Christian Leuz, 1 April 2022
Paper: Internalizing Externalities: Disclosure Regulation for Hydraulic Fracturing, Drilling Activity and Water Quality
The rise of shale gas and tight oil development has triggered a major debate about hydraulic fracturing (HF). In an effort to mitigate risks from HF in unconventional development, many U.S. states have introduced disclosure mandates for HF fluids. In this paper, we study the effects of this important regulatory initiative on HF activity and its environmental impact. We find significant improvements in water quality, examining salts that are considered signatures for HF impact, after the disclosure mandates are introduced. We document effects along the extensive margin (less HF activity) and the intensive margin (less per-HF well impact). Most of the improvement comes from the intensive margin. Supporting this interpretation, we find that, after the introduction of disclosure, operators pollute less per unit of production, use fewer toxic chemicals, and that there are fewer spills related to the handling of HF fluids and wastewater. We also explore possible mechanisms through which disclosure regulation can be effective and find that public pressure likely plays an important role. Taken together, our empirical assessment of a major regulatory initiative for HF provides novel evidence on how disclosure mandates can help to internalize negative and fairly widespread external effects.
Christian Leuz is the Joseph Sondheimer Professor of International Economics, Finance and Accounting at the University of Chicago’s Booth School of Business.
Ane Tamayo, 11 March 2022
Paper: Sexism, Culture, and Firm Value: Evidence from the Harvey Weinstein Scandal and the #MeToo Movement
During the revelation of the Harvey Weinstein scandal and the subsequent re-emergence of the #MeToo movement, firms with a non-sexist corporate culture, proxied by having women among the five highest paid executives, earn excess returns of 1.6%. Returns for firms with female executives are substantially higher in industries with few women in executive positions, and for firms headquartered in states with a high level of sexism or gender pay gap. Firms in industries with many female executives or headquartered in less sexist states also earn positive abnormal returns, irrespective of whether they have female leaders themselves. Firms without female top executives exhibit improvements in gender diversity after the Weinstein/#MeToo events. Our evidence attests to the value of having a non-sexist culture.
Ane Tamayo is Professor of Accounting at the London School of Economics and Political Science.
Dragon Tang, 18 February 2022
Paper: The Effects of Mandatory ESG Disclosure Around the World
We examine the effects of mandatory ESG disclosure around the world using a novel dataset. Mandatory ESG disclosure increases the availability and quality of ESG reporting, especially among firms with low ESG performance. Mandatory ESG reporting helps to improve a firm’s financial information environment: analysts’ earnings forecasts become more accurate and less dispersed after ESG disclosure becomes mandatory. On the real side, negative ESG incidents become less likely, and stock price crash risk declines, after mandatory ESG disclosure is enacted. These findings suggest that mandatory ESG disclosure has beneficial informational and real effects.
Dragon Tang is a Professor of Finance at the University of Hong Kong and Associate Director at the Centre for Financial Innovation and Development.
Marcin Kacperczyk, 28 January 2022
Paper: Carbon Emissions and the Bank-Lending Channel
We study how firm-level carbon emissions affect bank lending and, through this channel, real, financial, and environmental outcomes in a sample of global firms with syndicated loans. For identification, we use bank-level commitments to carbon neutrality to proxy for changes in banks’ green preferences and, via these bank commitments, shocks to firms with previous credit from these banks. We find that firms with higher (lower) scope-1 emission levels previously borrowing from banks making commitments subsequently receive less (more) total bank credit. The economic mechanism at play is bank credit supply, and results are consistent with bank preferences for green rather than differential response to an increased firm risk. The reduction in bank lending to brown firms triggers the reduction in these firms’ total debt, leverage, total assets, and real investments. The effects are non-linear, with a strong cut (increase) in lending and investments for brown (green) firms, and mild effects for other firms. Despite the real and financial effects, we find no improvement in hard firm-level environmental scores for brown firms, but only evidence consistent with firms’ greenwashing. Overall, our results suggest that banks affect carbon emissions via credit reallocation (from brown to green firms) rather than via providing loans to brown firms for the investment necessary to reduce carbon emissions.
Marcin Kacperczyk is a Professor of Finance at Imperial College London.
Johannes Stroebel, 12 November 2021
Paper: A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios
Abstract: We propose a new methodology to build portfolios that hedge climate change risks. Our quantity-based approach explores how mutual funds holdings change when the fund adviser experiences a local extreme heat event that shifts beliefs about climate risks. We use the observed trading behavior to predict how investors will reallocate their capital when “global” climate news shocks occur, which shift the beliefs and asset demands of many investors simultaneously and thus move equilibrium prices. We show that a portfolio that holds stocks that investors tend to buy after experiencing a local heat shock appreciates in value in periods with aggregate climate news shocks. Our quantity-based approach yields superior out-of-sample hedging performance compared to traditional methods of identifying hedge portfolios. The key advantage of the quantity-based approach is that it learns from cross-sectional trading responses rather than time-series price information, which is limited in the case of climate risks. We also demonstrate the efficacy and versatility of the quantity-based approach by constructing successful hedge portfolios for aggregate unemployment and house price risk.
About Johannes Stroebel
Johannes Stroebel is the David S. Loeb Professor of Finance and the Boxer Faculty Fellow at the New York University Stern School of Business.
Alex Edmans, 8 October 2021
Paper: CEO Compensation: Evidence From the Field
Abstract: We survey directors and investors on the objectives, constraints, and determinants of CEO pay. 67% of directors would sacrifice shareholder value to avoid controversy on CEO pay, implying they face significant constraints other than participation and incentive compatibility. These constraints lead to lower pay levels and more one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Respondents view intrinsic motivation and reputation as stronger motivators than incentive pay. They believe pay matters to CEOs not to finance consumption, but because it affects perceptions of fairness. The need to fairly recognize the CEO’s contribution explains why flow pay responds to performance, even though CEOs’ equity holdings already provide substantial consumption incentives, and why peer firm pay matters beyond retention concerns. Fairness also matters to investors, with shareholder returns an important reference point. This causes CEO pay to be affected by external risks, in contrast to optimal risk sharing.
About Alex Edmans
Alex Edmans is Professor of Finance at London Business School and Academic Director of the Centre for Corporate Governance.