Recent survey evidence shows that the list of institutional investors paying close attention to environmental issues, with a consequent impact on their investment decisions, is increasing. A central factor that ought to be considered is the role of government regulation, especially the uncertainty surrounding it, and subsequent response of firms to those regulations against the background of a worsening environmental scenario. This is the dimension that Stefano Ramelli, Alexander F. Wagner, Alexandre Ziegler, and Richard J. Zeckhauser, investigate in their paper “Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections.” The authors argue that analysis of firms’ climate-related performance so far ignore the fact that firms differ with respect to both current environmental footprint and to climate responsibility. The latter, which includes firms’ future-oriented strategies and voluntary initiatives on the road to transitioning to a low-carbon economy, is the dimension mostly overlooked so far and the paper’s major contribution. The authors treat these two dimensions of the challenge separately and do so by exploiting stock price reactions to the shock to climate policy following the 2016 U.S. election, and the opposite shock from the 2020 election. These two political shocks provide a good laboratory to analyze the interconnections between climate regulation, firms’ climate-related performance, and firm value. The authors find that, while investors reacted to the 2016 election by rewarding carbon-intensive firms, investors also rewarded companies that showed stronger commitment to the environmental transition and climate strategies. How should one interpret these findings? The authors provide what they call the “boomerang hypothesis” as an explanation, where long-term investors expected the roll-back of climate regulation over the Trump administration to be transitory in nature and a blip against a backdrop of tightening environmental regulations as the corporate world grapples with how to achieve more ambitious greenhouse gas emissions. The evidence is consistent with the view that the Trump Administration’s expected environmental hostility may have led to higher, not lower, demand for climate-responsible firms by long-term investors.
Spotlight by Andrew Ellul
Photos courtesy of Stefano Ramelli, Alexander F. Wagner, Alexandre Ziegler, and Richard J. Zeckhauser
First published August 17, 2021