An important debate is playing out over the role of institutional investors in the global effort to mitigate climate risk and achieve net-zero emissions. While some believe that institutional investors are sufficient catalysts in preparing us for a low carbon economy, others are more skeptical and prefer regulatory interventions. This skepticism is fueled by the perception that a substantial number of institutional investors engage in “greenwashing” (i.e., actions that do little to reduce emissions).
Our paper contributes to this debate by exploring the motivation behind institutional investors’ public requests for climate-related information. We assess whether institutional investors request these disclosures because they actually value the information provided or simply want to portray a public image as committed to a green economy.
To examine our research question, we exploit the unique institutional features of the CDP, the world’s largest platform of climate risk disclosures. Institutional investors that sign up with the CDP are granted private access to climate-related information disclosed by thousands of firms around the world and, to the extent that the CDP publicly lists them, those investors can be considered to have publicly requested climate-related information.
We hypothesize that a significant portion of the motivation to join the CDP is a genuine desire to obtain information on corporate climate risk. This view is supported by recent research suggesting that, beyond altruistic motivations, a nontrivial number of institutional investors believe that climate risk has financial implications for their portfolio firms and that corporate disclosures are important in understanding that risk (Krueger et al. 2020; Ilhan et al. 2021). Furthermore, improving the environmental performance of their portfolio could help investment companies attract or retain clients that are sensitive to climate risk (Barzuza et al. 2019). Indeed, some major investors, most notably BlackRock, have been vocal in supporting a sustainable economy and in pledging their commitment to responsible investment.
However, institutional investors could also join the CDP simply to portray themselves as green (in addition to being highlighted on the CDP website, signatories often market their signatory status on their annual CSR reports). If not paired with an effort to reduce climate risk, this portrayal could mislead clients who are seeking to put their assets in green solutions. This possibility is supported by anecdotal evidence and by recent empirical work looking at institutional investors that sign on to the UN Principles for Responsible Investment (e.g., Gibson et al. 2021; Kim and Yoon 2022; Liang et al. 2021). Also consistent with this concern, the Securities and Exchange Commission has recently expressed suspicion that a significant number of funds could be engaged in greenwashing.
Using a sample of more than 7,000 public firms from 51 countries during the period from 2003 to 2020, we provide a systematic, empirical investigation to address this question.
We first test whether having shareholders that sign up with CDP prompts firms to disclose their climate information to the CDP. We find that it does. We next examine whether firms reduce their emissions after disclosing to the CDP. We find that they do, which suggests that investor signatories are in fact using the information disclosed. Finally, we provide insights into how signatories use the disclosures to get firms to reduce their carbon emissions. We document that, after firm disclosure, signatory investors are more likely to engage with top emitting firms and adjust their portfolio holdings in those firms.
The evidence presented in our study strongly suggests that institutional-investor signatories induce firms to disclose climate-related information, and investors use that information to encourage firms to reduce their carbon footprints. This suggests that institutional investors sign up with the CDP because they value the climate-related information disclosed. Overall, our results are difficult to reconcile with the notion that investors, at least in our setting, demand climate-related information for greenwashing.
REFERENCES
Barzuza, M., Curtis, Q. and Webber, D.H., 2019. Shareholder value (s): Index fund ESG activism and the new millennial corporate governance. S. Cal. L. Rev., 93, p.1243.
Cohen, S., Kadach, I. and Ormazabal, G., 2022. Why do Institutional Investors Request Climate Related Disclosures?. Available at SSRN 4138869
Gibson, R., Glossner, S., Krueger, P., Matos, P. and Steffen, T., 2021. Do Responsible Investors Invest Responsibly?. Swiss Finance Institute Research Paper, (20-13).
Ilhan, E., Krueger, P., Sautner, Z. and Starks, L.T., 2021. Climate risk disclosure and institutional investors. Swiss Finance Institute Research Paper, (19-66).
Kim, S. and Yoon, A., 2022. Analyzing Active Fund Managers’ Commitment to ESG: Evidence from the United Nations Principles for Responsible Investment. Management Science.
Krueger, P., Sautner, Z. and Starks, L.T., 2020. The importance of climate risks for institutional investors. The Review of Financial Studies, 33(3), pp.1067-1111.
Liang, H., Sun, L. and Teo, M., 2021. Greenwashing: Evidence from hedge funds. Working paper.
This post comes to us from professors Shira Cohen at San Diego State University and Igor Kadach and Gaizka Ormazabal at IESE Business School. It is based on their recent paper, “Why do Institutional Investors Request Climate Related Disclosures?” available here.