Greenness and its Discontents

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Of course, we chose this title as a variation on Globalization and its Discontents, by Joseph Stiglitz, which could have itself been a nod to Sigmund Freud:

Civilization and its Discontents.

Of course, as the topic of our – with PhD student Nilsu Uzunlar and Alan Scheller-Wolf –  research is Green Financing, it immediately reminded me of:

The Color of Money is a 1986 American sports drama film directed by Martin Scorsese. It is the sequel to the 1961 film, The Hustler, and stars Paul Newman reprising his role as “Fast Eddie” Felson, for which he won an Academy Award. The film also stars Tom Cruise playing a pool hustler. It had box office revenues of over $52 million (on a budget of about $14 million).

Of particular excitement to us is the bombshell news from yesterday that makes our paper – Greenness and its Discontents: Operational Implications of Investor Pressure – not just topical but also uncannily prescient (we are presenting our results at Annual POMS Conference in Minneapolis in April; we will post our paper on SSRN soon):

JPMorgan, State Street quit climate group, BlackRock steps back

Feb 15 (Reuters) – JPMorgan Chase’s and State Street’s  investment arms on Thursday both quit a global investor coalition pushing companies to rein in climate-damaging emissions, while BlackRock said it has transferred its membership to its international arm, limiting its involvement.

The decisions together remove nearly $14 trillion of total assets from efforts to coordinate Wall Street action on tackling climate change and came after the coalition, known as Climate Action 100+, or CA100+, asked signatories to take stronger action over laggards.

Financial firms have faced growing pressure from Republican politicians over their membership of such groups, amid accusations that committing to shared action could be a breach of antitrust law or fiduciary duty.

JPMorgan’s fund arm said it had decided not to renew its membership of CA100+ after building up its own investment stewardship capabilities. The Financial Times first reported the news. The unit manages $3.1 trillion.

Here is our abstract:

Publicly traded firms are exerting effort to reduce their carbon emissions, at least partially in response to pressure from investors. This pressure can come in the form of influencing the capital and debt markets, as well as by advocating for environmental transparency. The positive impact of investor pressure is manifest in its ability to foster sustainable business practices. However, investor pressure can also backfire: Firms can respond by selling their carbon-intensive assets to private companies, which reduces transparency and eliminates investor oversight, potentially leading to worse overall outcomes. Key intermediaries for investor pressure are environmental metrics: Different metrics can potentially focus firm actions very differently. We explore two prominent environmental metrics that have been proposed for carbon emissions: an absolute-based target for absolute emissions and an intensity-based target for emission intensity. We study the impact of these two environmental assessment metrics on a producer’s operational strategy – specifically their exiting, investment in emission reduction, capacity, and disclosure decisions. We do so by developing a sequential model to analyze the producer’s operational decisions at optimality, enhancing the traditional capacity planning modeling framework to capture the effects of investor sentiment, incorporating capital and debt markets within our model. Analysis of our model offers the following insights: (i) We uncover a possible mechanism to explain the phenomena of “greenhushing” in which a firm makes substantive emission reduction investments while not taking credit for this publicly. (ii) We illustrate settings in which use of the right metric can potentially harmonize divergent public interests – for example “federal” efforts to reduce emissions (i.e. via the Inflation Reduction Act) and “state” efforts to protect jobs in carbon-intensive industries. (iii) Specifically, we observe that, for high-emission companies, an intensity-based target increases the producer’s expected profit, leading to less divestment compared to the absolute-based target. We also find that the intensity-based target is more likely to facilitate investments in increased efficiency than the absolute-based target. Thus, utilizing the intensity-based target as the environmental assessment metric may channel investor pressure into more environmentally responsible outcomes.

Focusing on the tension in politics, we explicitly discuss Policy Alignment in Section 6:

From a policy perspective, the environmental pressure level should harmonize with policy objectives that promote efficiency improvement through emission reduction technologies. On the one hand, the Inflation Reduction Act is one of the most substantial investments in reducing carbon emissions, directing funds to meet emission reduction objectives (Nostrand 2023). On the other hand, many states prioritize policy objectives that prevent the loss of jobs, which could result from reductions in production level or the transfer of production lines to private entities; several states including Kentucky, Ohio, and Missouri proposed laws to prevent the use of nonpecuniary factors by investors in decision-making processes (Donefer 2023). Inspired by this misalignment between the federal and state level regulatory acts, we investigate the conditions under which the producer does not exit the market and explore whether policy alignment can be achieved, guiding producers toward a strategy favored by all policymakers.

…policy alignment at both federal and state governmental levels is possible when the environmental pressure is at a moderate level. In particular, the pressure level should not be too high so that the producer’s strategy is not to “exit” and it should not be too low to ensure that it nudges the producer to invest in emission reduction technologies.

Indeed, this is what JPMorgan Chase appears to be saying in this article:

In a statement, the New York-based JPMorgan Chase explained that it would exit the so-called Climate Action 100+ investor group because of the expansion of its in-house sustainability team and the establishment of its climate risk framework in recent years. BlackRock and State Street, which both manage trillions of dollars in assets, said the alliance’s climate initiatives had gone too far, expressing concern about potential legal issues as well.

“The firm has built a team of 40 dedicated sustainable investing professionals, including investment stewardship specialists who also leverage one of the largest buy side research teams in the industry,” the bank said in a statement shared with FOX Business. “Given these strengths and the evolution of its own stewardship capabilities, JPMAM has determined that it will no longer participate in Climate Action 100+ engagements.”

Yeah,  this will be fun!

Of course, for some time, Florida has opposed ESG considerations in investing, as it might affect the prices of, among other things, Florida Green Tomatoes😏:

Fried Green Tomatoes is a 1991 American comedy-drama film directed by Jon Avnet and based on Fannie Flagg’s 1987 novel Fried Green Tomatoes at the Whistle Stop Cafe.  It garnered positive reviews from critics and was a box office success, grossing $119.4 million on a $11 million budget.

 

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