Corporate emissions pledges do not affect stock price, but policymakers could offer non-economic incentives.
Climate change results from the overuse of the atmosphere, a global common pool resource, as a sink for greenhouse gases (GHG). Since the social cost of GHG emissions is not fully reflected in fossil fuel prices, some scholars have characterized climate change as a market failure. Governments are expected to intervene when markets fail, although scholars such as Ronald Coase and Elinor Ostrom challenge this argument. Thus, across the world, to correct this market failure, governments have enacted policies such as carbon taxes, cap and trade, and renewable portfolio standards.
Yet, these policies are failing to curb GHG emissions sufficiently. The planet is close to overshooting the 2015 Paris Climate Agreement’s aspirational target of limiting global temperature increases to 1.5 degrees Celsius with respect to pre-industrial levels.
Alongside government policies, many corporations have announced voluntary net-zero emission targets. For example, Amazon has pledged to reach net-zero carbon by 2040 and has launched and invited other firms to commit to zero emissions via its Climate Pledge program. The financial sector has embraced net zero commitments as well.
A well-established literature explains why firms might voluntarily agree to stricter standards that exceed legal requirements. There is a consensus that firms need to receive something in return for the additional costs they have to incur. These incentives include monetary benefits such as a share price boost in recognition of the firm’s climate actions, regulatory relief, or goodwill with important stakeholders.
In a recent paper, we examined the stock market response to corporate net-zero commitments that have been verified by the Science Based Target Initiative (SBTi). Established in 2015, SBTi was born from the partnership between the United Nations Global Compact, the World Resources Institute, and the World Wildlife Fund for Nature. In 2022, CDP (formerly the Carbon Disclosure Project) also joined the partnership.
SBTi offers a technically competent multi-stakeholder platform to verify corporate pledges without conflicts of interest. Its seal of approval provides a credible climate leadership signal, which can create reputational benefits limited to SBTi members. This seal of approval could provide incentives for firms to invest in climate pledges because stakeholders might reward them for their efforts.
Around 4,000 firms worldwide have submitted their emission pledges for SBTi verification. The number of firms with SBTi-approved pledges has increased from 133 in 2018 to 2,097 in 2022, covering about 34 percent of the global economy by market capitalization.
Stock markets are probably the most powerful stakeholders in corporate net-zero commitments. Some climate advocates argue that stock markets will reward firms with credible climate commitments because such pledges prepare firms for future climate regulations and climate disruptions. Pro-climate business leaders such as Larry Fink—the CEO of BlackRock, the world’s largest investing firm—claim that firms will reap financial rewards from proactive climate actions. Credit rating agencies have also started to incorporate firm-level climate-related indicators into their metrics.
In contrast, critics suggest that stock markets will punish firms for proactive environmental policies because climate commitments divert resources from profit-seeking activities. Republican attorneys general of several U.S. states have sued financial companies that pursue climate goals.
Yet a third school of thought suggests that stock markets will shrug off these commitments because they think that, at best, these measures do not fundamentally change how firms do business, or at worst, constitute greenwashing.
We examined these divergent hypotheses about net-zero climate commitments and quarterly stock prices in the context of the S&P 500 firms for the 2010–2023 period. In terms of process, firms seeking SBTi approval submit a letter of intent that outlines their emission reduction targets. SBTi’s technical experts review these plans. Once a plan has been approved, the SBTi assigns it to one of the following categories: 2 degrees Celsius, well below 2 degrees Celsius, or 1.5 degrees Celsius, indicating the level of global temperature the plan will contribute to.
As of February 2024, among S&P 500 firms, five have their targets verified at the 2 degrees Celsius level, 25 at the well-below-2 degrees Celsius level, and 102 at the 1.5 degrees Celsius level. Also, 56 firms have committed to target verification in the near future.
Using multiple statistical approaches—event study, matching, and the weighted two-way fixed effects—we investigated whether these different groups of firms experienced stock price changes after joining SBTi.
We find little evidence that SBTi membership—of any classification—has had any effect on stock prices. If stock markets are not providing incentives for firms to undertake climate actions, policymakers and climate advocates need to focus on providing nonfinancial rewards to encourage firms to invest in emission reductions. For climate critics, the lesson is that corporate climate pledges are not harming profits; hence, their claims that managers are reneging on their fiduciary duties toward shareholders when firms commit to net-zero emission targets do not have empirical support.
