How do firms choose between transition and status quo strategies
This paper, by Cauthorn et al. investigates whether firms engage in competitive sorting into climate transition and status quo strategies, analogous to Roy’s (1951) model of hunters and fishers. The authors focus on the industrial base sectors (energy, industrials & basic materials, and mining & metals) due to their importance in the transition to a net-zero economy. The authors employ two main methodological approaches:
- Signing Motivations Methodology:
– Uses OLS regressions to analyze the impact of firms editing their ESG scores (either improving or worsening them) on stock returns.
– Interprets results based on predicted signs from various motivations for editing ESG data.
- Confirmatory Factor Analysis (CFA):
– Extracts latent climate strategies using firms’ ESG score edits as measurement variables.
– Uses future growth measures (M&A activity, revenues, and market reaction to the Inflation Reduction Act) as confirmatory variables.
– Employs Structural Equation Modeling (SEM) to estimate the impact of these latent strategies on stock returns.
Key findings:
- Evidence of Competitive Sorting:
– Energy firms show positive stock returns for both transition (+52 basis points) and status quo (+24 basis points) strategies.
– Mining & metals firms exhibit positive stock returns for transition (+83 basis points) and status quo (+77 basis points) strategies.
– Industrials & basic materials firms show positive stock returns primarily for status quo strategies (+18 basis points).
- Environmental Policy Impact:
– Competitive sorting is more evident in countries with low environmental policy stringency.
– In high stringency countries, firms may be forced to pool towards transition strategies, limiting value-relevant competitive sorting.
- Grey Zone Strategies:
– Firms without clear transition or status quo strategies (in the “grey zone”) experience negative stock returns, particularly in low environmental stringency countries.
- Societal Pressures and Litigation Risks:
– Evidence suggests that editing ESG scores to be better is associated with negative returns, possibly due to perceived compliance costs.
– Editing scores to be worse in low environmental policy stringency countries is associated with negative returns, possibly reflecting increased litigation risks.
The authors conclude that Roy-like sorting exists in climate strategies and is valued by the market, particularly in countries with less stringent environmental policies. This research highlights the importance of understanding the dynamics of climate strategies in firm valuation and the potential impact of environmental regulations on corporate strategic choices.
Roy Sorting: Climate and Status Quo Strategies
Authors: Thomas Cauthorn, Samuel Drempetic, Andreas Hoepner, Christian Klein, Adair Morse
From: University of Kassel, University College Dublin, University of California-Berkeley
Climate change and manufacturing concentration
Ponticelli et al. in this paper examine the short-term and long-term effects of temperature changes on U.S. manufacturing plants using data from the U.S. Census Bureau spanning 1977-2018. The authors employ two main empirical strategies:
- Panel approach: Examines short-run effects of yearly temperature shocks on plant-level outcomes. More specifically, outcomes are regressed on temperature bins, controlling for plant, industry-year, and state-year fixed effects.
- Long differences approach: Analyzes long-term responses to climate change over four decades, between the 1980s and 2010s, at the commuting zone level.
Key findings:
- Short-run effects:
– Additional hot days significantly increase energy costs and lower productivity for small plants.
– Large plants are mostly unaffected by temperature shocks in the short run.
– There are no significant short-run effects on plant exit or downsizing.
- Long-run effects:
Commuting zones that experienced larger temperature increases over four decades saw: a decline in the number of manufacturing plants and a
higher concentration of manufacturing activity among larger plants.
- Mechanisms:
– Energy prices: The effect of higher temperatures on concentration is larger in industry-regions facing higher energy costs.
– Managerial skills: Industries with higher participation in electricity management practices show lower impacts of temperature changes on concentration.
– Hedging across locations: Multi-plant firms appear better able to cope with temperature changes.
The findings suggest that large manufacturing plants are better equipped to adapt to climate change, potentially due to economies of scale in energy efficiency, better management practices, and the ability to hedge across multiple locations. This differential adaptation capacity contributes to increased local industry concentration in areas more affected by climate change.
Temperature, Adaptation, and Local Industry Concentration
Authors: Jacopo Ponticelli, Qiping Xu, Stefan Zeume
From: Northwestern University, University of Illinois
