A study by Brian Jacobs and colleagues published in Journal of Operations Management analyzes market reaction to various environmental announcements of large publicly traded firms.
A key finding regarding carbon emissions reduction announcements is that announcements are viewed negatively by the market, in contrast to environmental philanthropy announcements, which are viewed positively. The authors cite a working paper with similar results with respect to carbon reduction announcements, which are even stronger when specific targets are made (Fisher-Vanden, and Thorburn, 2008).
What could this mean? The authors state that
- “while initial emission reductions may improve ﬁnancial performance, subsequent reductions are more likely to result from costly pollution control”
- “Despite the beneﬁt in terms of mitigating future regulatory risks or positively impacting reputation, the market remains concerned about announcements of voluntary emission reductions… it is possible that the market negatively values voluntary efforts at reducing emissions because of the visibility of direct, assignable costs, while the revenue impacts of such efforts are highly uncertain. Therefore, announcements of voluntary emission reductions efforts should be accompanied by formal justiﬁcations as to why these efforts are being conducted (for example, preparing for future legislation, competitive lobbying, or anticipated carbon trading) and what the expected value from these efforts is likely to be.
Considering carbon emissions reduction announcements by such firms as HSBC, News Corp., and Cisco, energy cost savings also tend to be stressed in addition to GHG reduction targets. So another control for a study like this would be whether cost savings (due to Scope 2 reductions) are included in announcements. This would hit on an additional justification that markets might clearly understand. Overall, I agree that markets must have a clear understanding of the connection between GHG reduction announcements and shareholder value, and it’s up to firms to make this link crystal clear, whether from a revenue, cost, or risk perspective.