Luohan Academy on December 17, 2021 organized “Corporate Green Development in the Climate Era.” The seminar featured Patrick Bolton, Professor of Economics at Columbia University and the former chairman of the American Finance Association.
Professor Bolton presented findings from analysis of the climate commitments of thousands of the world’s largest companies, as published in his papers “Firm Commitments” (2021) and “Global Pricing of Carbon-Transition Risk” (2021) co-authored with Marcin Kacperczyk of Imperial College London.
This work is vital. Much of the media focus on climate commitments has been on national level goals, including the recent commitments by countries at COP26. Meeting the 1.5 degree goal requires limiting net emissions to an estimated 300Gt of CO2 after 2020. To put that task in stark perspective, 300Gt is only 8.5 years of current emissions. While 113 countries have made commitments, success will heavily rely on the individual enterprises that drive economic activity. Many firms have made climate commitments, and Bolton wanted to systematically examine the empirical impact of these commitments on emissions reduction and on valuation of the firms.
For his studies, Bolton relied on two global initiatives - the Carbon Disclosure Project (CDP) and the Science Based Target Initiative (SBTi). CDP started in 2002 as a project to track climate disclosures, and as of June 2019, it had climate plans from over 6000 companies, 100 states and 500 cities. Designed to be more proactive, SBTi was founded in 2015 as a collaboration of CDP, the UN Global Compact, the World Wide Fund for Nature, and the World Resources Institute. While CDP has largely sought to track and register climate plans, SBTi aims to have companies commit to carbon reduction consistent with the 1.5 degree goals. As of 2020, SBTi included over 1000 companies in 60 countries. The research team used CDP data from 2011 to 2019 covering approximately 2,000 companies commitments, and SBTi data covering 455 companies from 2015 to 2019.
The key findings published in “Firm Commitments” (2021) were that (1) commitments do seem to reduce emissions (2) commitments are mostly from “best in class” firms which are already good in their emissions, and (3) overall corporate carbon emissions remain high. The study shows that the commitments made in the last decade were helpful in "drawing the willing" but perhaps need stronger measures to get the companies that needed to reduce their emissions the most.
In another paper “Global Pricing of Carbon-Transition Risk” (2021), Bolton and Kacperczyk examined whether markets demanded higher risk premiums for companies with worse climate measures and hence more risks from climate transition. Bolton highlights 3 findings: (1) a P/E discount existed for companies with higher emissions, (2) the discount varied by industry and size with larger companies showing higher discounts, and (3) companies that disclose climate plans have lower discounts. In addition, the research indicates that risk premiums increased following the Paris Agreement, particularly in Asia. These findings do suggest that rising regulatory pressure and investor awareness may enable financial markets to distinguish firms that are better at addressing their climate footprints.
Bolton believes these positive trends can be strengthened with the financial community taking a more proactive role, from central banks to financial institutions and institutional investors. On central banks, Bolton highlights the example of the Bank of England’s Biennial Exploratory Scenario. The BES asked UK banks and insurers to estimate the size of climate change risks under 3 scenarios over a 30 year time horizon, and their plans on adjusting their business models under these scenarios. Such efforts make market players and large enterprises more focused on climate risks.
Finally, Professor Bolton discusses the potential of digital technology to help in three specific areas. First, in measuring and reporting carbon emissions. Second, in designing an efficient market for carbon offsets. And third, in enabling and promoting a more circular economy. Given the potential, these are areas Professor Bolton plans to focus more work on in the future. One specific project he is working with Luohan Academy is to study the use of digital technologies and platforms to advance the circular economy. This can be a major contribution of digital platform operators to the world’s climate goals.
Citations:
Patrick Bolton, Marcin T. Kacperczyk. Firm Commitments. Nov 2021, Working Paper.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3840813
Patrick Bolton, Marcin T. Kacperczyk. Global Pricing of Carbon-Transition Risk. Jul 2021, Working Paper.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3550233
