What causes some firms to do more to lower their greenhouse gas (GHG) emissions than the law obliges them to? Taking a deeper look at some of the most polluting firms in the USA, our associate member Professor Jennifer Griffin and her co-authors Andrew Bryant and Vanessa G. Perry came up with some surprising findings in their article ‘Mitigating climate change: A role for regulations and risk-taking’ published in Business Strategy and the Environment.
Firms in industries that emit high levels of greenhouse gases (GHG) face increased legislative pressure and stakeholder scrutiny to do more to curb their emissions. Traditionally, economic theory has assumed that firms will comply with legislation, but not voluntarily go beyond what is laid down in law, on the basis that doing more than what is required would cost more money, and thus not be cost effective.
In this article, however, the authors suggest that counter to our traditional economic rationale of mere compliance, some firms will seek to do more and go beyond legislative compliance especially if they are (a) major GHG emitters and (b) risk tolerant. The authors hypothesised that heavily polluting firms facing a patchwork of formal and informal pressures from external stakeholders such as consumers, governments, non-governmental organisations, etc, which makes them more likely to go beyond requirements in extant law, as they may see an opportunity to generate advantages such as increased loyalty while trying to avoid a bad reputation, if they simply did the bare minimum.
The authors also suggest that firms with a higher risk tolerance may do more than the legal minimum, as a form of hedging of different types of risk. That is, a risk-tolerant firm (from a financial risk perspective) may be less inclined to take climate change risks, and may therefore invest in unproven climate change technology, which might be expensive, but could make a big difference to the climate. Doing more than the law currently demands can also be a kind of insurance policy, whereby if firms have been caught doing something environmentally damaging in the past, going beyond compliance may be seen as an opportunity to offset past misdeeds or to improve their reputation or as a form of greenwashing.
The effect of regulations, risk-taking and green-washing
The authors evaluated 2,433 heavily polluting US firms operating in industries emitting the largest volume of greenhouse gases between 2013-2016 and found much evidence to support the proposed relationships. Firms operating in industries with the highest GHG emissions are more likely to voluntarily undertake activities beyond required by extant law. Further, if these heavily polluting firms also have a high tolerance for risk the effects are amplified: they are more likely to engage in beyond compliance activities. Taken together, the results suggest heavily polluting firms view financial risk different than regulatory risk (specifically, climate risk) leaving open questions about the relationships between risk-taking and firm’s environmental behaviours.
In addition, as expected, firms with a poor record of climate change activities in the past were also more likely to go beyond compliance which may be a form of offsetting past misdeeds or greenwashing.
Collectively, the results lead the authors to conclude: “our findings support the idea that firms within GHG-intensive sectors, facing stringent institutional context, are likely to engage in positive environmental action to mitigate climate change. As such, we show a counterintuitive role of public policy and public concern in promoting environmental sustainability. Specifically, more regulatory oversight has the potential to spur positive environmental actions resulting from a firm's attempt to shape regulations or to buffer against additional scrutiny, especially for firms having a high risk tolerance.”
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