How do banks react to firms’ climate risks? Using almost 80,000 global syndicated loans originated from 2001 to 2021, we study bank lending to fossil fuel firms vis-à-vis other firms. We find that loans to fossil fuel firms are at least 7 % more costly compared to other firms, and even more so toward the end of our sample. However, loan amounts to fossil fuel firms are approximately 22 % larger, implying heavy financing of brown activities. We show that the pricing effects are even stronger for banks with higher reliance on ESG considerations, consistent with the shifts driven by the supply side (bank behaviour). Overall, our findings corroborate the view that banks price in climate risks but continue to heavily lend to polluting firms in the medium term (with an average maturity of four and one quarter years

Our paper analyzes whether a planner should design a taxonomy for sustainable investment products when conventional tools for environmental regulation can also be used to address externalities arising from firm production. We first show that the private market provision of ESG funds marketed to retail investors involves greenwashing , so that a mandatory taxonomy is necessary to generate real effects of sustainable finance . However, the introduction of such a taxonomy can only improve welfare, on top of optimally chosen environmental regulation, if financial frictions constrain socially valuable economic activity. Otherwise, environmental policy alone is sufficient to optimally address externalities

The US Securities and Exchange Commission’s mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages were previously disclosed and when the pay ratio disclosure adds little new information. Disclosures by firms with a high ratio contain more discretionary language to explain the ratio or portray employee relations positively and are more likely to be covered by the media. However, neither information source substantially alters the employee response to a salient ratio. Our work illustrates that requiring firms to disclose a salient metric can have unintended consequences on employees and suggests caution in requiring firms to report simplified Environmental, Social, and Governance (ESG) metrics that are inherently multifaceted

Institutional investors expect infrastructure to deliver long-term stable returns but gain exposure to infrastructure predominantly through finite-horizon closed private funds. The cash flows delivered by infrastructure funds display similar volatility and cyclicality as other private equity investments, and their performance similarly depends on quick deal exits. Despite weak risk-adjusted performance and failure to match the supposed characteristics of infrastructure assets, closed funds have received more commitments over time, particularly from public investors. Public institutional investors perform worse than private institutional investors. ESG preferences and regulations explain 25%–40% of their increased allocation to infrastructure and 30% of their underperformance

We propose and implement a procedure to dynamically hedge climate change risk. We extract innovations from climate news series that we construct through textual analysis of newspapers. We then use a mimicking portfolio approach to build climate change hedge portfolios. We discipline the exercise by using third-party ESG scores of firms to model their climate risk exposures. We show that this approach yields parsimonious and industry-balanced portfolios that perform well in hedging innovations in climate news both in sample and out of sample. We discuss multiple directions for future research on financial approaches to managing climate risk

We document a smaller expansion of the negative CDS-bond basis and lower selling pressure during the Covid crisis for bonds issued by firms with high environmental and social (E&S) scores, relative to bonds from low E&S firms. This pattern is consistent with lower investor outflows from sustainability focused funds rather than fund managers discriminating among which bonds to sell. Our results suggest that the relative performance of high and low E&S bonds during a crisis is influenced not only by shifts in firm fundamentals, but also by non-fundamental factors such as investor preferences and trading behaviour.

We investigate whether green innovators voluntarily provide innovation disclosure to reduce processing costs for stakeholders and gain green-specific disclosure benefits. We observe that green patenting firms provide more innovation disclosure in conference calls than do other innovating peers, controlling for patent value. Using a patent-call unit of analysis, we also provide within-firm evidence that managers highlight their green inventions more on conference calls relative to their other inventions. Green innovators provide more innovation disclosure when the costs of processing patent information are higher and anticipated disclosure benefits are greater. We find some evidence that innovation disclosure is positively associated with green fund ownership and stronger market responses to conference calls as well as proxies for ESG-related reputation. Our findings highlight both capital market and social capital benefits as motivating forces for voluntary innovation disclosure and suggest the nature of a firm’s innovations can impact its information environment

The Sustainability Accounting Standards Board (SASB) has classified sustainability topics as material or not material for investors. We leverage the staggered release of the SASB classifications from 2013 to 2016 to examine whether and how they prompt changes in U.S. firms' sustainability performance. We measure sustainability performance using RepRisk scores, which reflect environmental, social, and governance (ESG) incidents. We find that RepRisk scores on sustainability topics classified as material decrease following the release of SASB classifications. Conversely, incident scores on nonmaterial sustainability topics increase. This suggests that firms improve their sustainability performance on topics the SASB deems relevant for investors while simultaneously performing worse on irrelevant topics. Firms adjust their internal sustainability policies to mirror these changes. The changes in sustainability performance occur primarily through two channels. We document that higher exposure to the classifications from shareholder pressure and sustainability-linked executive compensation prompts managers to prioritize sustainability topics classified as relevant for investors over irrelevant ones

Firms falling short of earnings expectations are more likely to cite stakeholder-focused objectives in their public communications following earnings announcements. This behavior is consistent with managers preferring to be evaluated by subjective stakeholder-based performance criteria when falling short on objective shareholder-based measures. This increased use of stakeholder language is most evident among firms narrowly missing earnings estimates and appears unrelated to a firm’s actual environmental, social, and governance (ESG)-related activity. Stakeholder language appears to influence the evaluation of CEOs; turnover–performance sensitivity is lower for managers citing stakeholder value. Collectively, our findings are consistent with concerns that stakeholder objectives reduce managerial accountability for poor performance

In this address, I discuss differences across investor and manager motivations for considering sustainable finance— value versus values motivations—and how these differences contribute to misunderstandings about environmental, social, and governance investment approaches. The finance research community has the ability and responsibility to help clear up these misunderstandings through additional research, which I suggest.