With growing public attention to the risks posed by climate change, investors have increasingly scrutinized companies about the environmental impact of their operations. Capital markets reflect this increased attention to the risks associated with climate change and the risks associated with a decarbonized energy transition. In our recent research, we show how such transition risk exposure is already embedded in stocks and bonds issued by publicly traded companies (Bolton and Kacperczyk, 2021; Lazard Climate Center, 2021; Bolton et al., 2022). This attention to firm-level greenhouse gas emissions has prompted companies to assess their exposure to transition risk and, in recent years, to communicate their assessments and, in some cases, their strategies for managing these risks. .
In our recent study, we examine companies’ communication strategies on the climate change transition risk of constituents of the Russell 3000 over a period of 2011-2020. There are three complementary channels through which companies can communicate about their climate change risks and goals: 1) disclosure of greenhouse gas emissions from operations and supply chains, 2) commitments to reduce climate change. carbon footprint of operations, supply chains or investments, and 3) soft news messaging through earnings calls or press releases. We observe several patterns around climate communication.
- First, companies have increased their disclosure of Scope 1 carbon dioxide emissions, those associated with internal company operations; Scope 2 emissions, those associated with the consumption of electricity produced off-site by the company; and Scope 3 emissions, those associated with carbon embedded in the company’s supply chain or released downstream by subsequent consumers of the company’s production. Specifically, Scope 1 disclosure increased by 174% and Scope 2 disclosure by 163% over the 2011-2020 period. Currently, about a quarter of all US large-cap companies disclose their emissions. Less than 10% of companies disclose their Scope 3 emissions, whether measured upstream in the supply chain or downstream to subsequent consumers.
- Second, corporate decarbonization commitments have become much more common over the past decade. The two most common corporate emissions target frameworks are the CDP, which allows great discretion in the timing and stringency of a company’s emissions target, and the Science-Based Target Initiative ( SBTi), which requires participating companies to select emission targets compatible with limiting global warming to no more than 1.5°C above pre-industrial temperatures. Since 2011, the number of CDP commitments has more than doubled. In 2020, around 15% of companies had adopted an emissions target via the CDP and almost 4% had done so via the SBTi. Emission reduction efforts have lagged behind ambitious emissions targets. We have assessed companies’ progress in reducing emissions and estimate that nearly three-quarters of companies with emissions targets will need to accelerate their annual rate of emissions reductions in order to meet their targets.
- Third, business representatives and those who engage them through earnings calls have addressed climate change, greenhouse gas emissions and transition risk more frequently in recent years. We retrieve and analyze transcripts of revenue call reports for relevant climate and environmental bigrams. We find that business leaders discussed climate-related topics more frequently in the updated leadership section of earnings calls, with the 2018-2020 average 67% higher than the corresponding 2011-2013 average . Similarly, the 2018-2020 average frequency of climate-themed discussions in the Q&A section is 75% higher than the corresponding 2011-2013 average. Yet earnings calls remain a more sporadic form of climate news reporting, with only 5% of companies using this channel, compared to disclosure (26%) and pledges (19%).
While corporate climate messaging has unquestionably become more pervasive in communicating news, commitments and results calls, particularly over the past five years, there is substantial variability in the relationships between different forms of climate messages. Disclosure is found to be a key predictor of future decarbonization commitments, as companies that have disclosed have a 48% higher likelihood of committing in the future. However, the subsequent effect on telephone communications on revenues turns out to be largely non-existent. Disclosure companies are only 1% more likely to discuss climate-related topics in future updates on earnings calls, and less than 1% more likely to be asked by investors during Q&As. The predictive effects of disclosure on the actual sentiment score are also minimal. Very similar results on earnings forecasting, frequency and sentiment of climate-related topics are observed for companies making commitments.
As companies increasingly report on their greenhouse gas emissions and climate-related efforts, we next assess the implications for emissions and company valuations. First, we estimate the extent to which these three forms of climate communication predict future emissions. Companies that disclose data on their emissions have, on average, 21% fewer emissions the following year than those that do not disclose. Committing to a CDP commitment does not have a statistically significant correlation with future emissions levels, although companies that signed SBTi commitments have on average 21% fewer emissions the following year than those who did not. These relationships most likely reflect a selection effect as companies with lower emissions – and an expected lower emissions trajectory over time – are more likely to disclose and make an SBTi commitment in the first place. We also find a positive correlation between the commitment horizon and future emissions, suggesting that companies are less likely to take action to reduce emissions in the short term when they commit to the longer term.
Second, we estimate the impacts of climate communication on price-earnings ratios. In an earlier study (Bolton et al., 2022) we found a valuation discount (lower P/E ratios) related to the size of a company’s carbon emissions. We find that the disclosure of Scope 1 emissions offsets some of this valuation discount: on average 48% of the emissions P/E discount. Companies in more emissions-intensive industries offset more of this offset, with energy companies offsetting the rebate entirely, and industrial companies offsetting about four-fifths of the rebate through disclosure.
Decarbonization commitments produce the same directional valuation effects as disclosure, but at a much lower magnitude and with limited statistical significance. When it comes to earnings calls, we see some interesting differences in valuation effects depending on whether climate topics are covered in the management update section or the investor Q&A section. We see a negative P/E effect when climate topics are discussed during the management update, but no significant effect is seen for the Q&A section. When we estimate the effect of the full set of communication measures, it becomes clear that disclosure and sentiment of the Q&A section are the most important predictors of evaluation.
Over the past decade, investors have become more concerned about the carbon footprint of the companies in which they invest. This partly reflects heightened distress over accelerating climate change and current and future climate change mitigation policy responses. This partly reflects greater investor concern about the climate impact of their investment decisions. Both of these reasons would lead investors to demand better information about companies’ current emissions, the likely trajectory of emissions, and the actions they are taking to reduce their emissions. Voluntary disclosure of corporate emissions, voluntary commitments in the near to mid-future to reduce emissions, and discussions of climate change implications in earnings calls each provide opportunities for companies to communicate information to these interested investors. .
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