Voluntary corporate environmental initiatives and shareholder wealth

Researchers debate whether environmental investments reduce firm value or actually improve financial performance. We provide some compelling evidence on shareholder wealth effects of membership in voluntary environmental programs (VEPs). Companies announcing membership in EPA's Climate Leaders, a program targeting reductions in greenhouse gas emissions, experience significantly negative abnormal stock returns. The price decline is larger in firms with poor corporate governance structures, and for high market-to-book (i.e., high growth) firms. However, firms joining Ceres, a program involving more general environmental commitments, have insignificant announcement returns, as do portfolios of industry rivals. Overall, corporate commitments to reduce greenhouse gas emissions appear to conflict with firm value maximization. This has important implications for policies that rely on voluntary initiatives to address climate change. Further, we find that firms facing climate-related shareholder resolutions or firms with weak corporate governance standards – giving managers the discretion to make such voluntary environmentally responsible investment decisions – are more likely to join Climate Leaders; decisions that may result in lower firm value.     

Voluntary corporate environmental initiatives and shareholder wealth

Researchers debate whether environmental investments reduce firm value or actually improve financial performance. We provide some compelling evidence on shareholder wealth effects of membership in voluntary environmental programs (VEPs). Companies announcing membership in EPA's Climate Leaders, a program targeting reductions in greenhouse gas emissions, experience significantly negative abnormal stock returns. The price decline is larger in firms with poor corporate governance structures, and for high market-to-book (i.e., high growth) firms. However, firms joining Ceres, a program involving more general environmental commitments, have insignificant announcement returns, as do portfolios of industry rivals. Overall, corporate commitments to reduce greenhouse gas emissions appear to conflict with firm value maximization. This has important implications for policies that rely on voluntary initiatives to address climate change. Further, we find that firms facing climate-related shareholder resolutions or firms with weak corporate governance standards – giving managers the discretion to make such voluntary environmentally responsible investment decisions – are more likely to join Climate Leaders; decisions that may result in lower firm value.     

Regulation with direct benefits of information disclosure and imperfect monitoring

We model the optimal design of programs requiring heterogeneous firms to disclose harmful emissions when disclosure yields both direct and indirect benefits. The indirect benefit arises from the internalization of social costs and resulting reduction in emissions. The direct benefit results from the disclosure of previously private information which is valuable to potentially harmed parties. Previous theoretical and empirical analyses of such programs restrict attention to the former benefit while the stated motivation for such programs highlights the latter benefit. When disclosure yields both direct and indirect benefits, policymakers face a tradeoff between inducing truthful self-reporting and deterring emissions. Internalizing the social costs of emissions, such as through an emissions tax, will deter emissions, but may also reduce incentives for firms to truthfully report their emissions.     

Pollution and Capital Markets in Developing Countries

It is said that firms in developing countries do not have incentives to invest in pollution control because of weak implementation of environmental regulations. This argument assumes that the regulator is the only agent that can create incentives for pollution control, and ignores that capital markets, if properly informed, may provide the appropriate financial and reputational incentives. We show that capital markets in Argentina, Chile, Mexico, and the Philippines do react to announcements of environmental events, such as those of superior environmental performance or citizens' complaints. A policy implication is that environmental regulators in developing countries may explicitly harness those market forces by introducing structured programs of information release pertaining to firms' environmental performance: public disclosure mechanisms in developing countries may be a useful model to consider given limited government enforcement resources.     

Competitive investment in clean technology and uninformed green consumers

In a market where consumers and the regulatory authorities are not fully informed about the actual production technology or environmental performance of firms that engage in strategic competition, I study the effect of environmental consciousness of consumers on firms׳ incentive to invest in cleaner technology. Firms compete in prices and may signal their environmental performance to uninformed consumers through prices. I also analyze the effect of an expected liability on firms in this setting. Compared to full information, incomplete information generates higher strategic incentive to invest in cleaner technology particularly when consciousness and/or expected liability are not too high. Requiring mandatory disclosure of technology or environmental performance may discourage such investment. Even though consumers and the regulator are uninformed, competition has a positive effect (relative to monopoly) on the incentive to invest.     

Multiple receptor ambient monitoring and firm compliance with environmental taxes under budget and target driven regulatory missions

We analyze the potential for an environmental monitoring agency under different regulatory missions to use multiple measures of ambient pollution levels to induce firm compliance via endogenously determined probabilistic firm-level inspections of polluting activities. Departing from previous analyses, we consider a framework where the regulator has multiple, rather than a single, measures of ambient pollution in a setting where many firms are subject to a self-reported emissions tax that is not perfectly enforceable. Under a budget-driven mission, we show that a regulator can fruitfully utilize the added information from multiple ambient monitoring receptors to induce improved environmental compliance through the creation of strategic interactions among firms. Additionally, our results provide new evidence on the relative efficiency of budget- vs. target-driven environmental enforcement missions.     

On optimal audit mechanisms for environmental taxes

We consider the auditing problem of an environmental enforcement agency with fixed audit resources: How to decide which firms to audit after having observed the firms' taxable emissions reports. The goal of the agency is to implement the socially efficient emissions level. The audit mechanism is the agency's sole choice variable, while other variables such as the tax rate on emissions and the fine for non-compliance are determined by other governmental actors. The fines and budget of the agency are constrained in such a way that the common random audit mechanism fails to implement socially efficient emissions. Assuming perfect information among the firms, we derive an optimal audit mechanism capable of implementing the socially efficient emissions level. The optimal audit mechanism creates a contest exploiting the strategic interdependencies between the firms, where the probability of winning (not being audited) for each firm depends on costly efforts (their taxable emissions reports).     

Constructing meaningful environmental indices: A nonparametric frontier approach

Environmental information disclosure programs seek to motivate firms to reduce their environmental impact. A variety of environmental impacts are reported in these programs and often this information is aggregated into a composite environmental index (CEI) for easier communication. The challenge is to create a meaningful index that allows environmental performance to be compared over time and space without ambiguity. In this paper, we argue that it is important to develop a cardinally meaningful and standardized CEI and use a nonparametric frontier approach to constructing such an index. This approach has the advantage to handle issues associated with data irregularity and the mixed measurability of underlying variables. We apply this approach to constructing a CEI for evaluating the environmental performance of manufacturing facilities in different industrial sectors in Los Angeles based on data from the toxic release inventory. We show how the CEI can be used to improve facility-level environmental performance. A sensitivity analysis is conducted with respect to the uncertainty in data accuracy, which demonstrates the robustness of the nonparametric frontier approach in constructing meaningful environmental indices.     

Good news for environmental self-regulation? Finding the right link

We investigate the stock market response to firm disclosure of positive environmental information and the link from that information to environmental outcomes. We classify environmental media releases by informational content and value relevance, and assess the abnormal stock returns of each type of event. While announcements of future environmental activities lead to the largest favorable stock market reactions, there is no guaranteed link from this type of information to environmental outcomes. Further analysis of the abnormal returns shows that the magnitude of the stock market reaction depends on firm financial characteristics across all event types rather than on firm environmental performance. Our results indicate that the ability for voluntary environmental information disclosure to induce environmental self-regulation is limited to the extent that firms are able to follow through with their announcements of planned environmental activities.     

Do voluntary pollution reduction programs (VPRs) spur or deter environmental innovation? Evidence from 33/50

We study whether a government-sponsored voluntary pollution reduction program (VPR) promotes or deters the development of new environmental technologies that yield future emission reduction benefits. Using a panel of 127 U.S. manufacturing industries defined by 3-digit SIC classifications over the 1989–2004 period, we estimate impacts of industry-level participation in the 33/50 program, a VPR initiated by government regulators in 1991, on industry-level rates of environmental patenting. We find that higher rates of 33/50 program participation are associated with significant reductions in the number of successful environmental patent applications five to nine years after the program ended.     

Toxics Release Information: A Policy Tool for Environmental Protection

This study examines investor reactions to the repeated public disclosure of environmental information about firms in the chemical industry and the effectiveness of this information as a decentralized mechanism for deterring their pollution. By allowing investors to benchmark the performance of firms, repeated provision of the Toxics Release Inventory led firms to incur statistically significant negative stock market returns during the one-day period following the disclosure of that information in the years 1990–1994. These losses had a significant negative impact on subsequent on-site toxic releases and a significant positive impact on wastes transferred off site, but their impact on total toxic wastes generated by these firms is negligible.     

Barriers to worldwide institutionalization of social and environmental disclosure

This study analyzes how groups of organizations that share their social and environmental information are formed in a similar way to identify barriers to the homogenization of social and environmental disclosure (SED) at the international level. Based on a sample of observations of listed firms from six different countries, results suggest that SED does not homogenize globally, spontaneously, because of cultural and geographical barriers. The institutions of environmental disclosure (ED) and social disclosure (SD) are different, thus forming different organizational fields at the international level. The spoken language is a barrier to the international isomorphism of ED and therefore to its comparability. However, language is a less important barrier to SD. When cultural institutions are weaker or have the same roots as North American institutions, cultural diversity does not stop the homogenization of the SD. Moreover, the ED is more isomorphic/comparable at the global level than SD, while the SD is more isomorphic/comparable at the level of culturally distinguishable subsets than ED.     

Linking permit markets multilaterally

We formally study the determinants, magnitude and distribution of efficiency gains generated in multilateral linkages between permit markets. We provide two novel decomposition results for these gains, characterize individual preferences over linking groups and show that our results are largely unaltered with strategic domestic emissions cap selection or when banking and borrowing are allowed. Using the Paris Agreement pledges and power sector emissions data of five countries which all use or considered using both emissions trading and linking, we quantify the efficiency gains. We find that the computed gains can be sizable and are split roughly equally between effort and risk sharing.     

Environmental policy à la carte: Letting firms choose their regulation

Under uncertainty, the optimal choice between price and quantity instruments depends on the technology of the regulated firms, which is often private information. We consider an environmental policy that delegates the prices-versus-quantities decision to the firms by offering them the choice between an emissions tax and permit trading. Such an approach is currently used in Swiss climate policy. We provide a detailed characterization of the optimal policy and show that this approach reduces expected social costs compared to a pure tax or permit-trading regime. We demonstrate that an optimal allocation of firms to instruments can be achieved despite substantial informational constraints, and that all firms gain from the introduction of the instrument choice compared to optimally designed single-instrument policies. Furthermore, we discuss the conditions under which this approach is likely to be preferable to a hybrid regulation.     

Green clubs

This paper treats programs in which firms voluntarily agree to meet environmental standards as “green clubs”: clubs, because they provide non-rival but excludable reputation benefits to participating firms; green, because they also generate environmental public goods. The model illuminates a central tension between the congestion externality familiar from conventional club theory and the free-riding externality familiar from the theory on private provision of public goods. We compare three common program sponsors—governments, industry, and environmental groups. We find that if monitoring of the club standard is perfect, a government constrained from regulating club size may prefer to leave sponsorship to industry if public-good benefits are sufficiently low, or to environmentalists if public-good benefits are sufficiently high. If monitoring is imperfect, an important question is whether consumers can infer that a club is too large for its standard to be credible. If they can then the government may deliberately choose an imperfect monitoring mechanism as a way of regulating club size indirectly. If they cannot then this reinforces the government's preference for delegating sponsorship.     

On the search for mimetic patterns in environmental disclosure: an international perspective

In this paper, we assert and test the proposition that environmental disclosure (ED) is structured by institutionalised myths and that is why ED is decoupled from environmental performance and media pressures. Focusing on firms from Canada, France and Germany, findings show that ED mimetic isomorphism for different topics varies among countries and by industry sensitiveness to the environment. The results corroborate the institutional presumption that institutionalised myths vary among different contexts. Our findings also suggest that institutionalised ED structures may not reflect environmental performance, mimetic patterns being affected by environmental performance. However, the decoupling between ED mimetic isomorphism and environmental performance decrease when firms’ ED credibility is questioned by the media.     

Green clubs

This paper treats programs in which firms voluntarily agree to meet environmental standards as “green clubs”: clubs, because they provide non-rival but excludable reputation benefits to participating firms; green, because they also generate environmental public goods. The model illuminates a central tension between the congestion externality familiar from conventional club theory and the free-riding externality familiar from the theory on private provision of public goods. We compare three common program sponsors—governments, industry, and environmental groups. We find that if monitoring of the club standard is perfect, a government constrained from regulating club size may prefer to leave sponsorship to industry if public-good benefits are sufficiently low, or to environmentalists if public-good benefits are sufficiently high. If monitoring is imperfect, an important question is whether consumers can infer that a club is too large for its standard to be credible. If they can then the government may deliberately choose an imperfect monitoring mechanism as a way of regulating club size indirectly. If they cannot then this reinforces the government's preference for delegating sponsorship.     

Unintended consequences of price controls: An application to allowance markets

Price controls established in a cap-and-trade allowance market are intended to reduce cost uncertainty by constraining allowance prices between a ceiling and floor; however, they could provide opportunities for strategic actions by firms that would lower government revenue and increase emissions. In particular, when the ceiling price is supported by introducing new allowances into the market, firms could choose to buy allowances at the ceiling price, regardless of the prevailing market price, in order to lower the equilibrium price of all allowances. Those purchases could either be transacted by firms intending to manipulate the market price or be induced through the introduction of inaccurate information about the cost of emissions abatement. Theory and simulations using allowance elasticity estimates for U.S. firms suggest that the manipulation could be profitable under the stylized setting and assumptions evaluated in the paper, although in practice many other conditions will determine its use.     

Environmental policy and misallocation: The productivity effect of intensity standards

Firm-level idiosyncratic policy distortions misallocate resources between firms, lowering aggregate productivity. Many environmental policies create such distortions; in particular, output-based intensity standards (which limit firms energy use or emissions per unit of output) are easier for high-productivity firms to achieve. We investigate the productivity effect of intensity standards using a tractable general-equilibrium model featuring multiple sectors and firm-level heterogeneity. Qualitatively, we demonstrate that intensity standards are always inferior to uniform taxes, as they misallocate both dirty and clean inputs across firms and sectors, which lowers productivity. Quantitatively, we calibrate the model to US data and show that these productivity losses can be large.     

Taxing Variable Cost: Environmental Regulation as Industrial Policy

Conventional wisdom has it that a country that enacts strict environmental regulations will place its firms at a competitive disadvantage. This view has been challenged recently. Some commentators argue that stricter regulation will enhance domestic competitiveness: strict regulations induce innovation. We evaluate this argument in a strategic trade model. In very special cases a strengthening of regulation may result in a shift of profits from foreign to domestic firms. This is not a general result, however. Environmental regulation should, of course, be imposed to control externalities, but it is unlikely that it will serve to generate industrial advantage.