Business school research round-up: sustainability

Long-term Macroeconomic Effects of Climate Change: A Cross-Country Analysis. Matthew E Kahn, Kamiar Mohaddes, Ryan NC Ng, M Hashem Pesaran, Mehdi Raissi, Jui-Chung Yang. Energy Economics (2021)

The authors study the long-term impact of climate change on economic activity, including its negative effects on labour productivity, the slowing of investment and the damage to human health.

Using data for 174 countries in the period 1960-2014, they find that per-capita real output growth is adversely affected by persistent changes in the temperature above or below its historical norm. There is not a statistically significant effect for changes in precipitation.

The effects vary across climates and income groups. They argue that all countries would experience a fall in GDP per capita, but under different assumptions rich (cold) countries suffer from larger output per capita losses than poor (hot) economies.

The analysis suggests that, in the absence of mitigation efforts, a persistent increase in average global temperature by 0.04C per year will reduce world GDP per capita by more than 7 per cent by 2100. Abiding with the Paris Agreement goals to limit the temperature increase to 0.01C per annum reduces the GDP loss to about 1 per cent.

The authors say these effects are somewhat larger than those generally discussed in policy circles, and that while adaptation to climate change could reduce the negative long-run growth effects, it is highly unlikely to offset them entirely. They call for a more forceful policy response to the threat of climate change, including more ambitious mitigation and adaptation efforts.

FT Business School Insights: Sustainability

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The Potential for Exchange-Traded Futures on Recycled Materials to Improve Recycling Efficiency. Jordan Moore, Daniel Folkinshteyn and Jordan P Howell. Investment Management and Financial Innovations (2022)

About half of all recyclable material is not recycled, imposing substantial economic and environmental costs. While there has been focus on tackling the problem using education campaigns, subsidies and technological innovations, the authors argue for the need to improve markets and exchange mechanisms.

“Post-consumer materials” are traded over the counter through opaque personal networks of processors and brokers. There is no centralised market mechanism for reporting price and volume data, and sellers face few repercussions for variable quality of supplies. That drives large industrial users to buy new materials instead.

The authors analyse data from the subscription website recyclingmarkets.net, a voluntary reporting mechanism of prices for recycled materials including glass and paper. They find price volatility is higher for recycled materials than it is for analogous new ones, with a monthly standard deviation over 6 per cent.

They also suggest that price volatility of recycled materials explains 12 per cent of the excess stock price volatility of waste management companies — highlighting potential to reduce volatility and be able to borrow at lower rates, invest more aggressively and increase stock market valuations.

The authors conclude that there are large potential economic and environmental benefits to creating a secondary market by listing exchange-traded futures on recycled materials, allowing buyers and sellers to lock in future prices and make recycled materials relatively more attractive than new. They argue that a major derivatives exchange should list and trade futures contracts on recycled materials.

Why Activist Hedge Funds Target Socially Responsible Firms: The Reaction Costs of Signaling Corporate Social Responsibility. Mark R DesJardine, Emilio Marti and Rodolphe Durand. Academy of Management Journal (2021)

This is an examination of the role of activist hedge funds in targeting companies that signal their commitment to corporate social responsibility (CSR). The authors study 506 activist hedge fund campaigns carried out in the US between 2000 and 2016. They use the MSCI KLD index to identify companies reporting CSR activities on factors including environment, community, diversity, employee relations and human rights.

They find that a company’s probability of being targeted by activist funds increased by 27.6 per cent when its signalled CSR activities increased by one standard deviation above the average level. The greater the level of CSR, the disproportionately higher the chance of an activist campaign against it.

The authors find that companies engaging in CSR are more likely to be targeted by activist hedge funds, which then suppress companies’ activities in CSR. They suggest that companies may restrict their signalling around CSR — using “strategic silence” — to avoid attracting the attention of activist funds.

The writers argue that protecting companies targeted by activist hedge funds could relieve pressures that undermine CSR. They call on socially minded and long-term shareholders to moderate the profit-centred interventions of activist hedge funds. Such shareholders should rethink investments in activist hedge funds through their pension funds and endowments.

They also suggest that policymakers and investors need to weigh the potential efficiency gains of activist hedge funds on companies against the negative effects for CSR and the long-term prosperity of the companies they target.

Shareholder Activism and Firms’ Voluntary Disclosure of Climate Change Risks. Caroline Flammer, Michael W Toffel, Kala Viswanathan. Strategic Management Journal (2021)

Little is still known about companies’ exposure to climate change risks, disclosure of them, and the strategic actions they take to manage and mitigate them. The authors explore whether, in the absence of mandatory disclosure, shareholders can drive greater corporate transparency.

They analyse data from CDP (the former Carbon Disclosure Project) on companies’ disclosure of climate risk information and from Institutional Shareholder Services, which compiles information on shareholder activism.

The authors find that the number of environment-related proposals submitted by a company’s shareholders induces managers to voluntarily disclose climate risk information. Environmental shareholder activism is particularly effective when initiated by institutional investors, above all those with a long-term horizon.

Companies that voluntarily disclose climate risk information following environmental shareholder activism achieve a higher valuation post disclosure, suggesting that investors value the voluntary disclosure.

They suggest that, in the absence of mandatory disclosure requirements, investors have a greater responsibility to be active owners and engage with companies. But they argue overall that public governance remains likely to be more effective in improving the quantity and quality of disclosure, fostering standardisation of disclosure, and ultimately making progress in the fight against climate change.

Machine Learning Based Attribution Mapping of Climate Related Discussions on Social Media. A Kaushal, A Acharjee, & A Mandal. Scientific Reports (2022)

The climate science community has been successful in influencing discussions on both the causes and effects of climate change, but government and policymakers have failed to effectively communicate the causes. To tackle the issue more effectively, they need to better understand the extent of engagement by the public.

The authors propose a way to help identify shifts in public reactions to climate change, and to target their responses more effectively as a result. They used a machine learning algorithm to identify, process and classify 1.7mn climate-related posts by 200,000 users on the social media discussion platform Reddit during the period January 2008-June 2021.

They identify 10 broad underlying themes in climate-related discussions, and find those relating to climate science, energy and wildlife spark considerably more discussion than carbon emissions, government and policymakers, global warming, population and economy, agriculture, plastic and waste and natural catastrophes.

They find a statistically significant positive relationship between climate science and both carbon emissions (a cause) and global warming (an effect), implying that climate science is doing a relatively superior job compared with policymakers in influencing the discussions on tackling climate change.

Although government-related discussions generally have a positive influence on those other conversations about global warming, overpopulation and economic health, they have not been very successful in communicating concerns over rising carbon emissions, sustainable farming or wildlife conservation to the general public.

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