Carbon emission, although primarily the research focus of climate scientists, is an imperative issue that requires collective effort and action from all parties around the world. The increasing number of billion-dollar climate disasters in recent years have triggered a growing environment awareness to combat weather changes. For example, although U.S. decided to withdraw from the Paris Climate Agreement, many other countries are designing new policies and setting long-term greenhouse gas emission reduction targets. In the financial market, many financial institutions, especially those that have made strong commitment on environment issues to their clients, have expressed opinions on climate risk by their investment decisions. How would firms respond to the preference on environmental and climate issues of their major institutional investors? A recent research paper conducted by HSRFC Members Prof. Zhenyu Gao and Prof. Wenxi Jiang, along with CUHK Business School researchers Prof. Darwin Choi and Hulai Zhang, addresses this important issue.
In the working paper entitled Global Carbon Divestment and Firms’ Actions, these researchers examine the actions of financial institutions and firms regarding greenhouse gas emissions. The study finds that financial institutions around the world reduce their exposure to stocks of high-emission industries after 2015, especially for those located in high climate-awareness countries, suggesting that institutions are concerned about climate risks in recent years. In the presence of divestment, public high-emission firms in the same countries tend to experience lower price valuation ratios, but they increase capital expenditure, research and development (R&D) expenses, and green innovation activities, and reduce emissions resulting from their operations. They do not find similar results using private firms, confirming that investors in the financial market plays a crucial role in disciplining public companies’ investment decisions related to climate issues. Overall, the results in their study suggest that divestment campaigns by financial institutions affect corporate real decisions by exerting pressure on public firms to adopt climate friendly policies and decrease carbon footprints.
Research paper: Global Carbon Divestment and Firms’ Actions