Scientists have been warning about climate change for years. Wildfires, landslides, melting icebergs and catastrophic hurricanes are just a few of the extreme climate-change related events that have occurred over recent years. Many companies have already adopted initiatives to protect the environment with some completely dedicated to going green. But this isn’t always the case.
According to research by Eliezer Fich, PhD, Dean’s Term Chair Professor of finance in Drexel University’s LeBow College of Business, and Guosong Xu, assistant professor of finance in Rotterdam School of Management at Erasmus University, while demand from investors for corporate accountability around climate change-related initiatives is growing, environmental proposals rarely receive wide support. In a recent study, Fich and Xu found that from 2006-2020 only 2.8% of such proposals passed during shareholder meetings.
The researchers argue that the lack of shareholder support comes from the perception that climate risks are a concern in faraway regions but not locally. They tested this conjecture in their paper, “Do Salient Climate Risks Affect Shareholder Voting? ” and found that shareholders are more likely to vote for/approve climate-related initiatives immediately after they are affected by a devastating weather event.
“Our experiment captures investors’ pure beliefs about climate risk rather than their portfolio firm’s actual risk,” said Fich. “Facing the same environmental proposal, institutional shareholders in areas hit by a hurricane are significantly more likely to support it after the strike. Experiencing such a weather event increases their subjective assessment of the climate risk faced by their firm.”
However, stock market returns on the voting date are significantly lower for firms that approve these proposals, according to the researchers. The results show that return on the voting day are 3.7% lower for firms that pass a climate proposal than for firms for which a similar proposal fails.
The researchers also found that both stock market and accounting returns are lower in the long-term for firms that adopt climate-related initiatives. These findings point to the highs costs of implementing climate-related policies, according to Fich.
“While our findings indicate that corporate climate-related initiatives harm shareholder wealth, we did not assess their impact on the welfare of society at large,” he said. “We hope that our work motivates other researchers to explore this important piece of the puzzle.”
The researchers published an article about their study in The FinReg Blog of the Global Financial Markets Center at Duke University School of Law that is available at this link.
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