By Inhwan Ko &
August 11, 2024
Source: Nature
Photo / Image Source: Unsplash,
Discussion
What might explain the lack of stock market appreciation for SBTi membership? Arguably, external stakeholders reward firms that have joined credible VEPs given concerns about greenwashing28. To be credible, VEP sponsors should have technical skills, no conflict of interest with their members, and credible monitoring and compliance features in the program design. While SBTi is sensitive to these issues, in recent years, it has been criticized for the validity of its verification methods. For instance, a recent study points out that SBTi allows firms to set a base year on their own—artificially high base year emissions might make it easier for firms to claim emission reductions in the future29,30. Our results, therefore, might reflect the stock market’s skepticism of SBTi pledges.
Yet, we recognize that firms might enjoy the reputational benefits of climate-VEP membership in ways other than stock market returns. Future work should explore whether SBTi membership impacts sales, employee retainment, or regulatory costs. However, our results offer some caution to proponents of voluntary pledges who might have oversold its profit impact. This poses a problem for the climate leaders who have sought to mobilize business support behind climate action using economic logic.
While stock markets may not support voluntary corporate climate pledges, we find that they do not hurt share prices either, as some conservatives have argued. Indeed, based on the argument that climate action hurts profits, several U.S. states, such as Texas, Florida, Louisiana, West Virginia, and Mississippi, have banned their state pension funds from investing in ESG-linked assets. Yet, not finding a negative reaction from the stock market may not sufficiently motivate firms to make substantively serious investments in climate actions solely on economic grounds. Arguably, policy rationale needs to be found outside the established financial criteria31 in terms of social and political legitimacy32,33. Future work should examine whether nonfinancial legitimacy might suffice to motivate voluntary corporate climate action without economic gains.
Although we examine SBTi-linked climate action focused on emission reductions, we recognize that other corporate climate policies might seek to enhance the resilience of firms’ operations or supply chains from climate-induced disruptions34. There is some work suggesting that bond raters reward cities that join adaptation-focused VEPs as opposed to mitigation-focused VEPs35, the rationale being that adaptation creates private benefits while mitigation benefits have public good features. Future work should explore whether the stock market response follows a similar pattern as bond ratings.
Our study has several limitations. As underscored earlier, we focus on S&P 500 companies only. Future work should look beyond these companies, especially because they are subject less to outside scrutiny and the media spotlight. Moreover, it is less clear that medium-sized or even small-scale companies would have the capacity and willingness to undertake climate action voluntarily, given its sizeable costs. If the smaller companies are connected with larger companies via supply chain connections, then voluntary climate action could be diffused through supply chain linkages, as documented in the case of other VEPs such as ISO 14001 and Responsible Care11,36.
VEPs can create positive benefits for members or shield them from negative events (such as product recalls, industrial accidents, advocacy action, regulatory problems, lawsuits, etc.), the so-called reputational cushion. While scholars have examined how industry-level VEPs may or may not provide a reputational cushion, future work should examine whether pan-industry climate VEPs such as SBTi provide reputational insurance to companies on climate issues.
Finally, since our main results rely on the matching techniques, they may depend highly on covariates used to conduct matching before estimation. Future research should expand the range of covariates for matching while minimizing bias from missing observations through a multiple imputation approach37.
Ko, I., Prakash, A. Stock markets, corporate climate pledges, and the Science-Based Target Initiative. npj Clim. Action 3, 69 (2024). https://doi.org/10.1038/s44168-02 4-00148-8
Received05 April 2024
Accepted24 July 2024
Published11 August 2024
DOIhttps://doi.org/10.1038/s44168-024-00148-8
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