Investors’ growing focus on environmental performance has led many firms to reduce their carbon footprint. However, this pressure can backfire if not calibrated correctly. New research from the Tepper School of Business explores how firms’ operational strategies differ based on the environmental metric used to assess impact. The study found that intensity-based metrics can channel investor pressure into more environmentally responsible outcomes, particularly when pressure is not too intense. This finding could help policymakers harmonize divergent public interests around emission reduction and local production. Carbon footprint, Sustainable business practices
Finding the Sweet Spot: Intensity-Based Emissions Approach
Facing mounting investor pressure to tackle its environmental credentials, a number of the agribusinesses have been introducing measures to curb their carbon emissions. But pressure can have an opposite effect if it is not well balanced which has a number of unforeseen effects.
Researchers at the Tepper School of Business recently illuminated this tension with two studies. In a paper, “Greenness and its Discontents: Operational Implications of Investor Pressure,” the researchers examine how a firm’s operational strategies change due to pressure from investors that enforces an environmental metric for impact assessment. The key finding? An intensity-based emissions reduction can only be acceptable in relatively mild conditions without a proper market pressure that forces for more environmentally friendly results.
The study confirmed that excessive environmental pressure from the market may lead to diverse operational strategies by varying levels of disclosure regimes and affecting both the erosion of firm value and environmental consequences. This is an important message for both policy makers and businesses, underlining the need to balance environmental imperatives with economic considerations.
Harmonizing Divergent Public Interests: Intensity-Based Approach as a Solution
The study, which was published as a working paper in the SSRN Electronic Journal, centered on two leading environmental evaluation metrics that institutions and regulators use assess firms’; environmental performance—absolute and intensity-based metrics.
The authors then created a stage model to estimate how these measures influenced firms operational decisions through equity and debt markets. They find that divestment under each disclosure regime due to high market-level environmental pressure is significantly influenced both by a higher absolute and relative measure of the environment, but firm value erosion occurs at lower levels of an absolute metric, leading to less frequent divestment for high-absolute firms.
In contrast, if the environmental pressure is not too high, under an intensity-based metric the firm should be forced to invest in corrective action; otherwise it would change from being efficient to inefficient producers by closing its dirtier plants. This leads us to believe that when the pressure from the market is not too intense, using the intensity-based approach will help direct investor pressure toward more sustainable choices.
Balancing Disparate Public Interests: The Intensity-Based Model In Practice
This has important implications for policymakers, who may find themselves caught between the desire to safeguard both the environment and local production and jobs in carbon-intensive industries.
Our finding that an intensity-based approach need not constrain production as much while also potentially resulting in more environmentally friendly outcomes might be especially attractive to policymakers, says co-author Sridhar Tayur. Washington is taking a top-down approach to bioenergy: current federal policy focuses on environmental considerations and minimizing impacts, while states are reacting to local political pressures… many states, including Washington,… undertake pro-active measures [to support their own forest practices] like recent biomass conversion laws aimed at encouraging in-state production. Our study demonstrates for an intermediate level of environmental pressure and under the right metric, seemingly divergent public interests can be reconciled.
These findings may also assist policymakers in identifying an approach that balances national objectives aimed at reducing emissions with state-level socioeconomic interests linked to protecting local employment and industry. Taking advantage of the insight provided by intensity-based metrics might help to find that balance between environmental gain and economic benefit.
