Week 3

Question 1

What are the two forms of carbon disclosure?

Answer 1

voluntary disclosure
- a way of signaling firm type and impact on society

mandatory disclosure
- a way of reducing uncertainty

Question 2

How is transition risk exacerbated by disclsoure?

Answer 2

non-diclosure = uncertainty

Question 3

What has resulted in a push for more disclosure?

Answer 3

TCFD and NDC

Question 4

What are the costs and benefits of voluntary disclosure?

Answer 4

BENFITS
- reduction in uncertainty
- reduced stigmatization - non-disclosure is suspicious of bad news
- response to pressure
- showing off

COSTS
- direct and indirect
direct…
- costs of tethering the info
- req, an agency to approve
- mobalise a lot of people to collect the information - not free - may need a small team of people

indirect..
- once disclosed - how will share price and equity react
- producing info might be negative - if higher emitter might reduce ii investment
- competitors - sensitive information - proprietary costs - effects how competitors view you - type of production could signal as to what kind of business you do
- expectations for future action - do you make it better or worse the next year

Question 5

What does BASF say in favour of disclosure?

Answer 5

• it is shown itself to be a leader not a laggard in climate for the chemical industry
• cost-benefit
• enables checks to see if they are on track for meeting goals and reducing GHG
• makes the business leaner and more efficient
• maximising business proposition

Question 6

In terms of information why is disclosure valuable

Answer 6

• levels of emissions are persistent - easier to predict.
  if you are a high emitter today you are likely to be a high emitter in the future as well
• changes are more difficult - yr on yr changes
  disclosure should be more meaningful therefore for short term risks rather than long term risks
• disclosure events predict subsequent commitments by firms - they are connected to disclosure plans
  followed by formal climate commitments
  investors cannot predict the new information - easier to see if the company is ACC on the right path
• additional signal as to how risky the company is - additional value of disclosure

Question 7

In terms of legitimacy why is disclosure valuable?

Answer 7

• any engagement activity is easier if information is obtained from the source
  potential law suits for misrepresentation in terms of investor choices
• divestment requires a strong proof of wrong-doing
  better proof in terms of the law or potential law suits

legitimacy is an important force for how investors behave - risk of law suit etc.

Question 8

What are some of the trends in terms of frequency of disclosure and why?

Answer 8

• small margin of companies are disclosing scope 3 - more concern with direct emissions = difficult to get this data
• disclosure levels are increasing over time, then reduced but generally speaking increasing = more pressure, benefits are higher as idea of tr is increasingly important to investors
• max 1/3rd of companies making disclosures still large chunk still not disclosing
• why the drop - true cost (data platform) increased the number of companies that it looked at- unlikely once you start disclosing you would stop

Question 9

what are the trends in terms of disclosure and country variations?

Answer 9

US companies have the most publically traded companies in the world and no difference between the number of companies that disclosed and the number estimated by true cost

France is 1 in the world for company disclosure for publically listed companies

only around 10% of information coming from China - hardly any disclosure coming from china

forces to disclose or not disclose are heterogenous

Question 10

Why is it difficult to understand the relationship between the effect of an activity and the effect of disclosing on that activity?

Answer 10

• the decision to disclose may not be correlated with the decision to engage with the activity
• the activity itself may be manipulated
• ESG activities are difficult to quantify and measure - carbon emissions comparably are relatively straightforward to measure - scope 1 and 2

Question 11

What is the relationship between company disclosure and cost of capital?- long term

please give me what you would expect and what you would ACC find

Answer 11

Expect that due to the reduced undertainty the cost of cap would go down as there is more information and therefore the premia for risks would be reduced

Find..
that there is not a statistically strong correlation - companies that disclose have a 25% reduction in cost of capital - which is statistically weak but economically strong impact

• the cost of cap is reduced by 25%

difficult to determine because the large amount of noise

Question 12

Why are there differences in long and short term transition risks and the impact (reduction) on cost of capital?

Answer 12

• investors already have a belief about what emissions are going to be - levels of emissions are much more perisitent - relatively easier to anchor the ballpark figure
  update of information is going to have a bigger impact on the hard to estimate short term transition risks
• reputational risk - easier to launch a campaign if you are able to see yr by yr change - putting the effort in now is better

Question 13

In summary what is the impact of disclosure on stock returns

Answer 13

disclosure of carbon emissions lowers the stock returns

this effect operates through the short term effect of changes in emissions

an increase in emissions increases stock returns

but went he firm discloses its emissions the effect of a positive growth in emissions on stock returns is muted

the coefficient for disclosure of scope 1 change including fixed effects are large and highly significant

Question 14

When did the UK introduce mandatory disclosure?

Answer 14

october 2013

Question 15

how is there asymmetric information in terms of disclosure?

Answer 15

the company knows more about what the company is doing than the investors

there might be adverse selection - difficult to process whether a company is good or not - might be overpaying for a company

Question 16

How is the UK used as a natural experiment?

Answer 16

2013 mandatory disclosure law - must report s 1 and 2 emissions - no longer a choice but an obligation

can look at the Paris agreement before and after

can see companies that disclosed before and companies that didn’t then you have the shock of the mandatory law

Question 17

How much did disclosure increase after the 2013 law?

Answer 17

20 percentage points - so almost 100% of firms disclose

not fully 100% as there is a 1 yr period after the law allowance to ensure that companies have sufficient time to comply with the regulation

Question 18

What is the expected impact of the 2013 law?

Answer 18

companies now have to dislcose, reduce uncertainties, more information thus cost of cap reduced

Question 19

What acc happened as a result of the shock of the 2013 Uk reg?

Answer 19

There is no additional value for companies that were already reporting before

prior non-disclosures benefit by a value of 3
but the benefit of disclosure was still lower if you had high emissions - market is now aware of the bad companies therefore they don’t get valued in the same way as the good companies

any company benefits but the bad companies benefit less

overall implication - it is a positive thing as it reduced the cost of cap for all companies - however it expose the bad guys but they still benefits but just not as much

Question 20

What are some of the benefits of mandatory disclosure?

Answer 20

• comparability and standardisation - every company has different discussions with investors
• ensure that you are environmentally conscious and have a strategy
• investor protection - small investor espc - small amounts of money - securities regulators are mandated to protect small investors therefore need to ensure that there is a level playingfield
• companies cannot hide as easily - easier for investor to verify carbon emissions etc. get a better summary

Question 21

What drives volutnary disclsoure?

Answer 21

• adverse selection and lemons problem
  companies that choose to disclose when they are not obligated to dislose show that they are better than average

Question 22

What is the spill over effect?

Answer 22

idea that when company A provides new information to investors they learn about company A but also about their competitor B in the process

information spills over

earnings report season - v focused moment when you learn a lot about the company and the surrounding market and economy in general

Question 23

What are we looking for when we are looking at spillover? and what do we find?

Answer 23

After the 2013 UK mandatory disclosure regulation we are looking to see if companies choose to disclose their emissions

there is an influential impact on disclosure - there is a positive spill over effect

• there is a general global increase in the number of companies that choose to disclose - particularly in non-eu European countries and asia
• there is no spillover effects in Asia

Question 24

Why is being in the same economic zone important?

Answer 24

Idea of market integration - companies are competing int he same market and facing the same investor pressure

therefore spillover effects are more likely to occur - spill over channel through capital markets especi. and on a smaller scale through product markets

Question 25

With the spill over effect being postive and significant what do we expect peer pressure to be - what is peer pressure in this instance?

Answer 25

peer pressure is understanding firms in the same inudstry as other firms that already disclose

• expect that due to spill over competitors will feel a greater pressure to do the same thing

Question 26

What do we find about peer pressure and the probability of disclosure?

Answer 26

using a duration analysis of the effect of past disclosures by peers

• it is highly significant and positive
• peer effects are stronger within industry - compare coefficient within and outside of industry fixed effects

this is consistent with the spill over effect

Question 27

what is the SEC proposal for mandatory disclosure?

Answer 27

• would include the company’s assessment and management of climate-related risks along with ghg emissions
• disclosure are not aimed at mitigating climate change
• investors are increasingly seeking and using climate related information
• public and private funds etc. demanded info on risks related to climate so that they can fulfill their disclosure, fiduciary or other obligations to investors
• investors turn to these data to help inform their investment decisions

Question 28

What happened with the Environmental protection agency in the US?

Answer 28

• EPA had been requiring comapnies to disclose on their emissions however, this was not for use by investors as a necessary information but to protect the environment
• law suit by companies argued that the EPA did not have authority to demand disclosure as it is too material
• supreme court ruled that the EPA had overstepped its authority so it had to remove the regulations - has to be legislated if it is going to be that important
• SEC proposal to introduce mandatory disclosure on carbon emissions and company assessment of climate related risks - argue that it is to fulfil the fiduciary obligations to investors - investors turn to data to qualify their investment decisions

Question 29

What is the issue with current disclosure in the US?

Answer 29

while there has been a push for disclosure and the markets are disclosing their information - this is imperfect

• there are varying degrees of specificity, standardisation and unreliability
• investors do not have the ability to understand and track how strategies are being implemented - the location of these disclosures is all over the place - making comparability a major challenge

Question 30

How have the SEC frammed their legsialtion?

Answer 30

investor protection - therefore reduced chance that the proposal will be shot down due to overstepping authority

Question 31

What is the objective of net zero commitments?

Answer 31

reduce carbon emissions sufficiently to avoid an average temperature rise of more than 1.5oc by 2050 with sufficiently high probability

Question 32

How many countries have made commitments and what percent of GDP is it

Answer 32

113 countries - 50% of the worlds GDP

Question 33

What is the GT of CO2 that was produced last year according to the IEA 2021?

Answer 33

31.5gt

Question 34

What did the business roundtable statement say that the purpose of a corporation is?

Answer 34

a fundamental commitment to all stakeholders

corporate purpose is to advance interests not just of shareholders but all corporate stakeholders

Question 35

What did Hart and Zingales 2016 argue?

Answer 35

companies should maximise shareholder welfare not market value

Question 36

what is Lucian Bebchuck’s critique?

Answer 36

efforts to advance stakeholder governance are mostly for show
- idea of greenwashing

Question 37

How is individual companies and the wider market interconnected in terms of commitments?

Answer 37

corporate stewardship works through collective action and coalition formation not just through individual action of a single company - private provision of public goods

explores the role of NGOs in building a movement towards net zero corporate commitments

idea that changes in the market don’t happen when individual company is working in isolation

Question 38

Does the CDP have any emissions reductions targets?

Answer 38

nope. does not require targets to be in line with a 1.5oc objective

companies targets can take the form of carbon intensity improvements -with or without absolute emissions reductions equivlanets or straight emissions reduction targets

Question 39

What formed the SBTI initiative?

Answer 39

Un Global Compact

the Worldwide fund for nature

world resources insitutue

Question 40

What is the purpose of the SBTi?

Answer 40

set to define and promote net zero targets in line with te climate science

induce companies to commit to decarbonisation pathways to increase the chance that global emissions can be reduced to a level that limits average temperature rise to below 1.5oc

Question 41

what is the key difference between SBTi and CDP?

Answer 41

CDP didnt have the business ambition for 1.5oc - SBTI is not just looking at pledges but pledges aligned with 1.5oc

net zero targets that are fairly ambitious

Question 42

What is the relationship betwen IPCC, IEA and SBTi?

Answer 42

IPCC - low granularity - lsets the carbon budget for a 50% probability of 2o increase in temp

IEA - mid granularity - think tank that allocated carbon budgets within each xector based on:
- their possible technological shifts
- a max of growth
- a subsequent CCS level

SBTi - is a high granularity - NGP that normalises the different messages from corporates - compares with the IEA budget allocation within each sector

Question 43

What are the general costs and benefits associated with joining ESG coalitions?

Answer 43

BENEFITS
- reputation of being among the environmentally good companies
- benefits for reducing risks translate into lower cost of cap
- commitments serve as signalling or advertisement of the firms intentions
- employee attraction or lower turnover if more environmentally sound

COSTS
- companies that join are incurring costs by curbing their emissions
-breaking the commitment could lead to reputational costs
- once you have made a commitment you may not be able to fulfil your promise and may end up being slower than you anticipated in reducing your carbon emissions

Question 44

What is the relationship between commitments and scope 1 emissions?

Answer 44

from 2013-2019 there is no signficant decline in emissions - even though the growth of company commitments has been generally positive

• there is no visible sign of decarbonisation - issue is that SBTI is only engaging with a select few companies that are already doing a lot and relatively clean - it is not engaging with the dirty industries

Question 45

In terms of targets what time period is best to really understand them?

Answer 45

shorter time periods - can track progress sooner - setting more commitments but then targets tend to be pushed back into the future

Question 46

what is CDPTGTHOR?

Answer 46

time interval between when the company begins to make a commitment and when they are going to start decarbonisiting - companies are pushing into the future

Question 47

From the data what is the CDP telling us?

Answer 47

It engages with comanies that have high emissions - not controlling for industry fixed effects there is a highly significant positive coefficient

relationship between commitment and direct emissions of the company

Question 48

What does the CDP and direct emissions tell us with fixed effects

Answer 48

A firm is less likely to commit to the CDP and track emissions if they have higher carbon emissions

Question 49

What is the relationship between PPE and CDP?

Answer 49

high PPE have high emissions
- among the firms that are large and have lots of PPE - the high emitters are the ones that are less likely to commit- there is a selection effect

Question 50

What is the relationship between commitment and low emitters?

Answer 50

• firms located in industries with low emissions are unlikely to bother with any commitments

firms are within a particular industry - if you control for all their characteristics, the ones that are likely to commit are the ones with the lowest emissions

Question 51

what is an extensive margin?

Answer 51

based on the idea that absolute level emissions reductions are stronger than emission intensity reductions

Question 52

What is an intensive margin?

Answer 52

exploits the variation in the magnitude of emissions reduction

Question 53

What does abate mean?

Answer 53

the max emission reductions divided by the size of emissions - weighting the size of the commitment and the timing of which you made the commitment - valuing earlier commitments

Question 54

What is the relationship between abate and emissions?

Answer 54

abate is negatively correlated to the size of emissions

big emitters to less abatement - make a smaller absolute size commitment or they push it back into the future

companies with high emissions tend to have late target dates into the future and tend to have smaller targets

firms with higher emissions reduction reduce their emissions at a slower annual rate

Question 55

What happens with target years for firm commitments?

Answer 55

Firms with higher emissions tend to extend their target horizon more into the future

Question 56

What is the relationship between size of firm commitments and emissions?

Answer 56

higher emissions tend to commit to smaller emissions reductions

Question 57

What does INDCOM mean or measure?

Answer 57

measures the fraction of companies within an industry that has already committed to either of the two initiatives - CDP and SBTi

Question 58

What is the relationship between peer effects and commitment to SBTi/CDP?

Answer 58

there is a strong postive peer effect influencing the decision to join a commitment movement

for the model without firm fixed effects there is a positive coefficient on the squared term meaning that the decision to join is more likely as more firms join

• the square term is INDCOMSQ - which captures the non-linear effects of the fraction of comantieis that have already committed to either of the initiatives

Question 59

what is the observed behaviour of firms choosing their baseline year?

Answer 59

emissions backdating - baseline year tends to be an anomalously high year where emissions were abnormally high already therefore reducing emissions from this outlier

this is particularly true for companies with high emissions

positive and statistically significant effect of the baseyear on the level of emissions

this means that the choice of the base year is unlikely to be random - firms tend to choose the years when emissions are the highest, making such a strategic choice allow sthem to meet any future target more easily

Question 60

What is the relationship between making commitments and future emissions levels - what is expected and what is observed?

Answer 60

Expecatation that is a company is making a commitment this should reflect in lower emissions in the yr1 and yr3 after

sort of what you find - coefficients are negatives but they are not significant for CDP therefore they are v noisy

SBTI is very significant for both periods and for both short and long term periods

Question 61

what is the argument for the merits of CDP and SBTi still?

Answer 61

engagement side - they are critical in playing a role to get companies to commit

Question 62

Where is the debate between carbon pledges and corporate purpose?

Answer 62

mainly cast at the level of an individual company - how it could be governed

largely abstracted from the broader socio-political context, social movements, and political coalitions to exert change

any significant change in corporate purpose comes about as a result of the collection action of coalitions

important to understand coalition formation for corporate social responsibility works, with a special emphasis on collective action towards mitigating climate change

Question 63

Can you give an example of when a proxy adviser demonstrated a new shareholder engagement approach?

Answer 63

Glass Lewis recommendatoin to vote against BHP’s climate transition action plan - a CDP commitment = over concerns that its target is not aligned with the latest client science.