Environmental and social issues have been the subject of several waves of public attention since the first half of the 20th century. Alongside this, the market exhibited increasing demand for green and socially responsible investment and disclosure. However, the internal motivations for this attention and the financial implications of corporate responsibility from a long-term perspective are still being debated.

Three scholars together adopted the Natural Language Processing(NLP) techniques on approximately 4 million historical business and economy news articles to investigate the macroeconomic drivers for the social and environmental public attention over the past 130 years. Furthermore, they analyzed the financial implication of the public attention and disclosure about environmental and social issues at the corporate level with a monthly basis.

Their findings: Public attention on social issues is inflated while facing high GDP volatility, unemployment, recessions, and wealth inequalities. Public attention on environmental issues is to the contrary. However, these attentions seem not related to corporate stock return and lowered corporate capital expenditure in the long term analysis. Social attention particularly erodes corporate investment efficiency. Overall, these findings raise doubts about the long-term value creation of corporate responsibility.

Want to know more? Read the paper: One Hundred and Thirty Years of Corporate Responsibility: This link opens a PDF document

Blog author: Zhenjia Yang (ReBI)

The Green Stock Puzzle: Does Responsible Consumer Preferences Matter?

Responsible Consumer Choices Impact Stock Returns, Recent Study Finds

Consumer choices significantly impact market dynamics. When consumers opt for green products, they encourage companies to adopt sustainable practices. This trend signifies a shift in consumer preferences, raising the question: Does responsible consumption affect the financial market and green stock performance?

A recent study by Xuhui Chen and his coauthors uses U.S. stock data from 2012 to 2022 to investigate how the ease with which consumers switch between products (demand elasticity) influences the financial performance of green and brown stocks. The study explores whether these consumer preferences and the ease of switching products explain the recent outperformance of green stocks.

The study finds that consumer preference significantly affects “green premium” – the extra return investors earn from green stocks. Green stocks beat brown stocks by a whopping 11.7% annually for high demand elasticity firms. However, the green premium disappears for firms with unique, hard-to-substitute products. The findings suggest consumer consumption preferences are crucial in determining green stock performance.

Want to know more? Read the paper: Responsible Consumption, Demand Elasticity, and the Green Premium

Blog author: Umair Afzal (University of Strathclyde)

Grow or Go Green?

Do firms prioritize expansion over compliance? A study finds that resource constraints are key driver of choice in this trade-off.

In 2005, the US Environmental Protection Agency (EPA) reported a 50% drop in corporate spending on pollution reduction efforts. This report inspired three researchers domiciled in the US, UK and Taiwan to analyse strategic decisions made by companies when faced with the dual pressures of environmental responsibility and business growth. Can firms truly balance expansion and eco-responsibility?

The study finds that the optimal choice between pollution reduction and capital investment varies significantly based on a company's stage of development and financial health. Early-stage enterprises, often characterized by limited resources and a precarious financial position, prioritize expanding their operations to secure long-term growth and financing. In contrast, mature companies with substantial financial resources adopt a more balanced approach, allocating resources to pollution abatement and growth initiatives based on the expected return on investment from each strategy. The study also explores the impact of green financing, suggesting that it can aid emission reduction by cushioning financial constraints whilst promoting pollution abatement activities.

Overall, the study highlights the critical role of financial constraints in shaping a firm's environmental actions and the need for tailored policy interventions that consider the financial status of firms to spur collective corporate action.

Want to know more? Read the paper: Financial Frictions and Pollution Abatement Over the Life Cycle of Firms

Blog author: Stacy Kuyewawa (University of Strathclyde)

Innovate or Lobby? Firms' Tactics in Green Transition

Green Innovation or Lobbying: What Drives Firms' Transition Strategies?

Firms Strategically Balance Innovation and Lobbying in Response to Regulatory Uncertainty, Recent Study Finds

Tackling climate change demands a move towards greener production and consumption models. Firms play a vital role in this shift by innovating green technologies. However, uncertainties about environmental regulation can hinder this transition, prompting firms to adopt dual strategies: innovation and lobbying. Are these strategies complementary or conflicting?

A recent study investigates how firms combine green innovation with lobbying efforts. They explore whether firms lobby to promote green innovation or to protect their existing brown operations.

Their findings reveal a complex interplay between innovation and lobbying. Firms engaging in green innovation do not necessarily lobby to increase demand for green products. Instead, many firms, especially those with significant market power and brown operations, lobby to maintain their status quo. These firms use lobbying to protect their current brown cash flows, resulting in higher rates of future adverse environmental incidents. Surprisingly, environmental rating agencies often overlook these lobbying activities, which can distort the true environmental impact of firms.

Want to know more? Read the paper Firms' Transition to Green: Innovation versus Lobbying

Blog Author: Stacy Kuyewawa (Strathclyde)

Consumers Consider ESG Issues with their Purchase Decision and Negative ESG Events Result 5-10% in Product Sales, Recent Study Shows.

Consumer choices directly impact companies' revenue and profit, serving as a fundamental social test of their ESG (Environmental, Social, and Governance) initiatives. Literature finds that a company's ESG performance is positively related to its aggregate sales, but what about on a per-household level?

Four authors together investigate the linkage between ESG incidents and product sells from the consumers perspective, exploring whether consumer reactions to a company's ESG shocks vary based on income levels, product types, and demographic factors.

Their findings: For at least four months times, the negative ESG events trigger a 5-10% decline in Product Sales per household level, and many companies are taking proactive steps to mitigate this impact, such as price adjustments. Furthermore, this linkage is relatively stronger in Democrat-Learning countries and among high-income millennials. Durable goods, including frozen foods and health and beauty products, are the most vulnerable.  

Want to know more? Read the paper: How Does ESG Shape Consumption?

Blog author：Zhenjia Yang (Strathclyde)

ESG Investments Boost Sales, Recent Study Reveals

As public interest in Environmental, Social, and Governance (ESG) issues grows, companies are questioning whether their ESG investments genuinely influence consumer behavior. The central question remains: Do consumers care about ESG factors or are they merely good PR? And if so, how does this concern translate into purchasing behavior? 

A recent study by Jean-Marie Meier and other scholars used barcode-level sales data between 2008 and 2016 from United States retail stores to research this question. They looked at how local sales relate to companies' ESG ratings, particularly focusing on areas with different product-year-level and demographic characteristics to ensure the reliability of their findings.

Their findings are compelling: Products from companies with higher ESG ratings saw increased sales, especially in Democratic-leaning and higher-income counties. Interestingly, sales dropped after negative ESG news, and areas affected by natural disasters became even more responsive to ESG performance. This study provides clear evidence that consumers do indeed care about ESG issues. They prefer products from companies with good ESG practices and penalize those with poor records. For businesses, this means that investing in ESG can positively impact sales, reinforcing the idea that doing good can also be good for business.

Want to know more? Read the paper: Do Consumers Care About ESG? Evidence from Barcode-Level Sales Data.

Blog author: Qifeng Yun (University of Strathclyde)  

Distinct Characteristics in CSR-linked Contracts Across US Industries Addresses Stakeholders’ Demand, Researchers Reveal.

Increasing societal expectations for corporate responsibility have led to a surge in the incorporation of ESG metrics into executive compensation schemes globally. However, could this trend of tying compensation to non-financial performance measures that are potentially easy to manipulate and hard to verify merely reflect executives exploiting their power to inflate their pay?

A team of researchers found evidence that can alleviate this concern. Focusing on the S&P 500 companies, they comprehensively investigate the types and characteristics of CSR-contingent contracts, and whether firms from different industries focus on distinct CSR aspects according to the relative importance of concerned stakeholders in the industry.

Main findings: CSR-linked contracts can be categorized into two types: objective ones (with clearly specified targets and compensations) and subjective ones (at the discretion of the compensation committee). A company can achieve better future CSR performance by adopting either type, as long as the choice is aligned with the attributes of its operation, governance structure, as well as its industry features.

Want to know more? Read the paper: CSR-contingent executive compensation contracts

Blog author: Kyung Yoon Kwon (ReBI), with Linxiang Ma (ReBI)

New Research Urges Broader Approach to Sustainable Finance: Biodiversity Risk in Focus

As sustainable finance gains increasing spotlight, the debate has been centred on the relationship between environment, social, and governance (ESG) aspects and firm performance. While much attention has been on dimensions such as climate change, some researchers have been advocating for a broader coverage. Specifically, biodiversity loss poses an existential threat to the global economy, with the recent losses of ecosystem services have been estimated to cause damages in the tens of trillions of dollars per year. Despite its importance, biodiversity risk has been understudied in economics and finance research in part due to its complexity and the challenges in how to measure it.

A team of researchers is among the first to investigate on the effects of physical and regulatory risks related to biodiversity loss on economic activity and asset values. Defining biodiversity as the total of genes, species, and ecosystems, these scholars explore how to quantify the related risks in the context of finance, and how these risks are related to the commonly mentioned climate risks.

Their findings: Based on companies’ annual reports and filings, these scholars propose biodiversity risk measures for US firms and industries. They further reveal that biodiversity risks are distinct from climate risks, and hence constitute a vital dimension of the planet's health that affects corporate operations and the financial market.

Want to know more? Read the paper: Biodiversity Risk

Blog author: Ellie Luu (ReBI)

Companies React Strategically to ESG Incidents by Tapping Nonprofit Expertise in Board Appointments, Recent Study Finds.

The increasing public scrutiny on corporate environmental, social, and governance (ESG) issues has prompted companies to react by adjusting their operating practices. One such adjustment is seen in their board structures, with the addition of directors possessing related expertise. But are these appointments mere window-dressing? Or are they effective in promoting firms’ ESG performance?

Three scholars down under have something to say: they study whether, in response to adverse ESG events, firms tend to hire directors with experience in the charitable sector. They also investigate whether shareholders view these hirings favourably, and whether they improve the firm’s future ESG performance.

Their findings are revealing. Following negative ESG incidents, especially those covered by influential media, companies are more likely to appoint new directors with experience working in charitable organizations, seeking their expertise in managing stakeholder relations. Such appointments are welcomed by stock market investors. These charity directors are effective in enhancing appointing firms’ future ESG performance, particularly in aspects related to employee welfare and community relations.

Want to know more? Read the paper: Appointing Charity Directors in Response to ESG Incidents.

Author: Linxiang Ma (ReBI), with Yuyang Zhang (University of Melbourne)