#Corporations

Environmentally sound and financially rewarding? Key findings from an exploratory study on the Science Based Targets Initiative (SBTi)

By Milena Bar, Ottilia Henningsson, & Dr. Kristjan Jespersen

◦ 5 min read ◦

The Science-Based Targets initiative aligns firms’ emission reduction targets with a net-zero emissions pathway. Firm commitment yields significant abnormal returns which are larger for firms committed to larger emission reductions and for high-emitting firms.

The IPCC’s sixth assessment established a code red for humanity and provided mounting evidence of widespread, rapid, and intensifying climate change. The Paris Agreement, ratified by over 190 states and non-state actors in 2015, formally stipulated the goals of limiting global warming to ideally 1.5°C and at a minimum well below 2°C with the aim of reducing the most catastrophic damages related to climate change onto the natural environment, human health and global financial market. The need for climate action is urgent and requires engagement from governments, individuals as well as corporate and investor participation.

Combatting climate change requires voluntary private sector engagement

Incentivizing corporations and investors to act voluntarily on climate change is critical to redirect private capital towards environmentally responsible business practices. The Science Based Targets initiative (SBTi) is becoming the global standard for firms seeking to set emission reduction targets aligned with the required global decarbonization targets established in the Paris Agreement. By encouraging voluntary corporate carbon emission reductions, the SBTi is a critical tool to reduce the private sector’s reliance on fossil fuels.

2021 record year for new approved targets and committing firms for SBTi

Since its founding, just seven years ago, SBTi has experienced exponential growth in the number of committing firms and has mobilized firms representing more than a third of global market capitalization to reduce their carbon emissions. In 2021 the initiative took steps to increase the ambition level of firms’ emission reduction targets. When first established, firms could commit to reduce their emissions either aligned with the reduction targets of 1.5°C or 2°C. However, from summer 2022, the initiative will only be accepting the more ambitious emission reduction target, as set out in their campaign Business Ambition for 1.5°C.

Since company engagement ultimately comes down to whether committing to SBTi will drive wealth for shareholders, understanding the stock market response to firm commitment to the SBTi is essential not only for businesses looking to commit, but also for investors. To justify the integration of a climate credential such as the SBTi in investment management, it needs to be able to provide excess returns. To understand the stock market reaction to firms’ announcement of SBTi commitment, we conducted a short-horizon event study on a portfolio of 1.535 firms.

Firm commitment to the Science Based Targets initiative aligns environmentally sound practices with financial viability

Firm commitment to the SBTi indeed yields a positive announcement abnormal return and thus speaks to the credibility of SBTi in constituting a credible signal of firm commitment to sustainable business practices. Even more encouraging is the finding that firms committed to the 1.5°C target experienced substantially higher returns, indicating a stronger positive market reaction when exhibiting a higher cost of commitment and higher target ambition level. The market evidently differentiates between ambition levels by rewarding businesses that are pledging themselves to more demanding emission reductions and a more climate-friendly business strategy. These findings are particularly relevant in light of the SBTi making the more stringent emission reduction target the new standard for all firms via their campaign Business Ambition for 1.5°C and may encourage more firms to increase their efforts in reducing their greenhouse gas emissions.

Stock price reaction in response to commitment to the Science Based Target initiative

In turn, high carbon emitting firms, proxied here by firms identified by the CA100+ list, reaped the largest reward in their stock price following commitment. This finding further confirms the market’s more sensitive reaction to costlier commitments, but also creates concern about whether the SBTi may have to rethink a recent strategic decision. The SBTi announced that they will not be accepting targets set by firms operating in the Oil and Gas industry, thus abandoning the industry specific methodology for fossil fuel firms which had been in development for several years. Fossil fuel firms have a key role to play in successfully achieving the goals of the Paris Agreement, thus begging the question of whether the SBTi is not missing out on covering an industry critical to combatting climate change and a sector of firms who are highly rewarded by the market for committing to reduce their emissions.

As climate disasters become more prevalent and more severe, firms who fail to transition to a low, or zero, carbon business model can be expected to become more vulnerable in the long run. To expand the analysis, we further tested the performance of a portfolio strategy screened for firms committed to the SBTi. Despite the underperformance of an SBTi screened portfolio against a portfolio consisting of only non-committed firms in the medium-term, there is reason to believe that a portfolio with SBTi committed firms may provide higher returns in the future. Given that SBTi commitment represents a commitment to aligning the firm’s operations with the net-zero emissions pathway, it can be perceived as a safer bet in the long run. Moreover, portfolios consisting of SBTi firms were shown to be characterized by lower volatility. The objective of investors is shifting to increasingly sustainable and impact focused investment profiles, hence portfolio and asset managers may use SBTi commitment as a filter in security selection to achieve their client’s demand.

Looking Ahead

Financial institutions have a key role to play in driving systematic economic transformation towards a global net-zero carbon emissions economy in their power to lend and invest. As evidenced, firm commitment, ambition level and cost of commitment are reflected in the stock’s pricing mechanism, making the business case for the firm to set ambitious targets for decarbonization, and providing rationale for investors to in the short run utilize the market’s reaction to firm commitment in investment processes and strategies.

About the Authors

Milena Bär is a recent graduate in MSc Applied Economics and Finance and is working as a student researcher in ESG and Sustainable Investments at Copenhagen Business School. Her research projects are mainly within the field of ESG metrics and regulation, with a focus on the investor’s side.

Ottilia Henningsson recently graduated with a MSc in Applied Economics and Finance from Copenhagen Business School with a keen interest in the transition towards a more sustainable financial industry.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Photo by Matthias Heyde on Unsplash

To stay or to go: Corporate complicity in human rights abuses after the coup d’état in Myanmar

By Verena Girschik & Htwe Htwe Thein

◦ 2 min read ◦

Foreign investors in Myanmar have come under increasingly intense pressure to cut ties with the Myanmar military since the military coup on 1^st February 2021. Immediately after the coup, Japan’s Kirin Beer announced its decision to cut ties with its joint venture partner MEHL, i.e. the commercial arm of the military. However, fellow investors did not immediately follow Kirin’s withdrawal. Instead, they appeared to be treading water to rid out the storm.

Myanmar had been undergoing democratic transition since 2011, promising developments and luring investors’ interests as the last frontier of the Southeast Asian market. Indeed, the democratic transition had pathed the way for economic and developmental achievements, attracted investments in several sectors such as garment manufacturing. Yet then the military took back power, among others to secure its economic interests.

Governments and civil society in their home countries have been calling on companies to act responsible and not to do business with the military.

The pressure on companies who had been sourcing from Myanmar, including popular fashion brands like H&M and Bestseller, has been mounting. H&M and Bestseller did respond to the call and did suspend their orders from Myanmar before deciding to resume orders in May. Several foreign investors have withdrawn as the military’s attack on the civilians intensified and the international community stepped up their sanctions regime. The latest step was the refusal of the ASEAN not to invite the military leader Senior General Min Aung Hlaing to the summit in October 2021.

But is leaving the country really “the right thing to do”?

Companies who stay support the military in one way or another, for example by paying taxes directly to the military or paying rent or other fees to one of the military conglomerates (MEHL). Such payments from corporate investors provide a financial lifeline to the continuation of the military rule, hence, funding is a very important aspect of this dilemma for foreign investors and policy makers alike. The governments of the U.S., UK, Canada, the European Union have imposed sanctions targeting military interests. However, those sanctions so far have fallen short of targeting it where it would really hurt the military, in particular in the oil and gas sector that provides a lot of revenue. To weaken the military’s financial lifeline, the shadow government and activists have been calling for companies to stop all kinds of payments to the military. Inside the country, boycotts of military intestates have intensified. For instance, householders have been participating in an electricity bill boycott, thus using the withdrawal of this kind of support as a form of resistance. Not surprisingly, many companies have by now decided to pull out.

Yet while leaving the country ceases support to the military, it also entails that companies no longer provide goods and services (including essential services) and support to the workers and civil society (e.g. Telenor; Germany’s food retailer Metro. Companies have been supporting workers by sustaining safe workplaces, thereby securing workers’ incomes and stability. What is more, their support has enabled and sustained social movements. For example, women union leaders in the garment industry have been a driving force in anti-military protests.

Given the severity of human rights violations by the military, companies ought not to continue business as usual. Only by leaving can they cut all ties with the military and avert their complicity in atrocious human rights abuses. But by leaving, they also cease support to their most vulnerable stakeholders. The impact on the social contributions (via CSR) and Myanmar civil society, especially their workers, might be devastating.

About the Authors

Verena Girschik is Assistant Professor of CSR, Communication, and Organization at Copenhagen Business School (Denmark). She adopts a communicative institutionalist perspective to understand how companies negotiate their roles and responsibilities, how they perform them, and with what consequences. Empirically, she is interested in activism in and around multinational companies and in business–humanitarian collaboration. Her research has been published in the Journal of Management Studies, Human Relations, Business & Society, and Critical Perspectives on International Business. She’s on Twitter: @verenacph

Htwe Htwe Thein is an Associate Professor in International Business at Curtin University, Australia. She is internationally known for her work on business and foreign investment in Myanmar and has published in leading journals including Journal of World Business, Journal of Industrial Relations, Journal of Contemporary Asia, International Journal of Cross-Cultural Management and Feminist Economics (and international publishers such as Cambridge University Press, Routledge and Sage). She is also well-known as a commentator in media and press on the Myanmar economy and developments since the military takeover on 1 February 2021.

Corporate democratic responsibility – messy and difficult, yet urgent and without alternative

By Dieter Zinnbauer

◦ 4 min read ◦

We live in politically tumultuous times. Authoritarianism is on the rise again across the world. Democratic freedoms have been in decline for 15 years in a row. The share of people living in free societies has shrunk to a meagre 14% of the world population. Meanwhile polarisation and populism, disinformation, mistrust and rising inequality have begun to hollow out the fundaments of even the strongest democracies. Votes for populist parties in mature democracies have risen from 3% in the 1970s to more than 20% today.

With democracy under attack everywhere how does and how should business position itself? What are the democratic responsibilities of companies? A tricky question well beyond the scope of a blog entry, but here some rather random notes and provocations on current trends and gyrations as input to this highly topical conversation.

Inaction is untenable, political neutrality unlikely.

It is less and less of a practical option anymore to hide behind a veneer of political neutrality no matter if rationalized instrumentally (the Republicans-are-buying-sneakers-too argument), normatively (it’s undemocratic for business to engage in high stakes politics beyond its own narrow business interests) or intuitively (the empirically tenuous claim that business tends to only support moderate, mainstream politics anyway). Here some reasons why:

For a start, it is not easy to find real-world contexts, where a principled commitment to free and fair markets and a principled rejection of crony capitalism would not also imply and indeed be predicated upon a commitment to competitive democracy. Or from a slightly different angle, the normative minimum for business – to respect human rights in its sphere of operation and influence –also entails respect for basic democratic rights and a related duty of care.

Remaining silent on democracy is therefore only an option as long as democracy is not in danger, as long as none of the substantive political forces in a country seek to actively dismantle load-bearing democratic norms and rules.

Yet in many countries this is not the case (any more). From Brazil to the Philippines from Poland or Hungary to the US, formally democratic regimes are under attack from within the political establishment. And in many more other countries fringe groups with dubious democratic credentials and intent often propelled by a toxic mix of populism and nativism are moving closer to becoming part of government.

Enter corporate democratic responsibility

Corporate responsibility in such contexts entails having a plan for and executing on corporate democratic responsibility on at least three different levels / time horizons.

For a start and most immediately it requires aligning non-market strategies with regard to corporate support for politicians, lobbying, public relations and other business and society interactions with an active stance and role in support of democracy. E.g. no funding for politicians and parties that have taken to destroying basic tenets of inclusive political participation (not just temporary bans until the PR tempest calms down), no lobbing on issues that corrode the fundaments of political equality, an active promotion of democratic values, for example along the lines of campaigns by German business associations against extremism.

In the medium term it calls for a democracy audit – an active interrogation of one’s own operations’ “democracy footprint”, and how one’s business model can best respect, protect and promote democratic values. Big tech platforms, for example, are being pushed to better understand and address their role for a healthy democratic discourse.

In long-term perspective it demands a deeper probing on how corporate conduct is linked to some of the underlying drivers of democratic decline and disillusionment. Growing inequality and declining social mobility, status anxiety and a profound sense of losing out and losing authorship of one’s life are all empirically confirmed to provide fertile ground for populism and creeping authoritarianism. To help restore a sense of individual economic and political efficacy, trust in societal fairness and public as well as private authority companies may wish to interrogate how practices around tax avoidance, regulatory arbitrage, shareholder primacy etc. intersect with these issues. This also includes questions around how reforms and new formats in corporate governance can help resurrect a sense of being in it together and revive the idea of the business organisation as a shared venture, an important venue for exercising citizenship and co-authoring one’s economic life world and, capable of collectively evolving a strong, responsible corporate purpose.

A rough, but necessary ride ahead

Good corporate democratic responsibility does not come easy. It means wading into a messy terrain and facing up to the perennial tension between defending democracy and curtailing freedom.

It involves business decisions on whether fitness-bikes should be permitted to spread rumours about voter fraud, whether couches and guest rooms should welcome riot tourists, whether rumour-mongers deserve cloud hosting or whether the president of the United States should be kicked off the world’s largest social network. Yet, all these things need to be reckoned with one way or the other as doing-nothing only cements a status quo of what is often democratic backsliding.

All these tricky questions around corporate behaviour in the context of democratic countries that are at risk of backsliding will also bring into sharper relief the perennial question of what companies can and should do when operating in outright authoritarian settings – a discussion well beyond the scope of this short blog entry but one that is returning with a vengeance given high-growth prospects in authoritarian settings or military coups in popular foreign investment destinations.

Finally, an honest grappling with corporate democratic responsibility will be agnostic to partisanship in principle and approach. But it is highly likely to be partisan in outcomes. Political incivility and anti-democratic behaviour are unlikely to be evenly distributed across the ideological spectrum in any given setting. So brace yourself for a partisan backlash and for a constant tight-rope walk between supporting democracy and being drawn into day-to-day politics. Getting this right will require the best of corporate strategy, corporate governance and corporate communication. But ultimately there is no escaping from corporate democratic responsibility. Flourishing economies and flourishing democracies ultimately depend on it.

About the Author

Dieter Zinnbauer is a Marie-Skłodowska-Curie Fellow at CBS’ Department of Management, Society and Communication. His CBS research focuses on business as political actor in the context of big data, populism and “corporate purpose fatigue”.

Photo by Fred Moon on Unsplash

Making Corporate Sustainability More Sustainable

For too many firms corporate sustainability is itself not a sustainable endeavor

By Andreas Rasche

Corporate sustainability initiatives are blossoming around the world. While some firms have built robust infrastructures around their efforts, other firms struggle to do so, making their engagement a short-lived endeavor. In other words, corporate sustainability is itself often not sustainable enough to create lasting change in organizations. While there is hope that firms’ sustainability strategies are becoming more robust (e.g., because basic market conditions have shifted in favor of sustainability and make it difficult to ignore), there is still much work to be done to create sustainable corporate sustainability efforts.

The Challenge of Integration

One important barrier is the belief that “integrating” sustainability is more important than having an own dedicated organizational infrastructure around it. In 2019, the Danish multinational Maersk laid off a significant part of its sustainability team (including the head of the division). The aim of the reorganization was to merge its ongoing sustainability activities with work undertaken in other departments of the company. While integration may sound like a sound strategy and for many years consultants advised firms to make sure that sustainability work is not detached from the core of the firm, it also comes at a price:

In many firms, integration “waters down” sustainability efforts, makes them less visible in the organization and hence easy to neglect.

Don’t get me wrong: I am not arguing against integrating sustainability into organizations. I am arguing against using integration as a cover-up strategy to make sustainability efforts themselves less sustainable. Integration can easily be misused. Take the example of business education. For many years, business schools have struggled with finding the right balance between creating standalone courses on sustainability topics and integrating related content into the regular curriculum. Over time, integration proved to be difficult and only very few schools succeeded with truly embedding sustainability content across their curriculum. The main hurdle was to free up room in otherwise already packed courses and to also move beyond a symbolic adoption of sustainability content in classes.

Business schools’ experience holds a lesson for corporations. If you integrate, you need to ensure that wherever integration happens enough resources support the journey (e.g., time, knowledge but also interest). Often, this is where integration fails…

The Challenge of Corporate Size

Another barrier to making sustainability more sustainable is corporate size. Recently, I published a paper that analyzed which types of firms are delisted from the UN Global Compact (UNGC). We analyzed over 11,000 firms (both active and inactive participants in the UNGC). One key finding was that small and medium-sized enterprises (SMEs) were much more likely to leave the initiative than larger firms. It would be easy to conclude from this that SMEs are less sustainable than larger firms – but this would be the wrong conclusion.

What it shows is that SMEs struggle to develop lasting organizational structures around their sustainability efforts. UNGC delisting is based on firms’ failure to submit a mandatory annual implementation report. While larger firms usually do not struggle with such reporting, because this task is anchored somewhere in the organization, smaller firms find it more difficult to make reporting a lasting endeavor (e.g., because of resource constraints or lack of knowledge). Often, sustainability commitments by SMEs are based on internal champions who push relevant efforts and also sign the organization up to the initiatives like the UNGC. Once these people leave the organization or assume a different role within the firm, there are little formal structures that could fill the void that is left behind.

SMEs sustainability work is often more implicit and tied towards the communities they operate in. However, in a more transparent world where sustainability is increasingly datafied and benchmarked such implicit efforts may be easily confused with corporate sustainability lacking sustainable implementation.

Sustainable Corporate Sustainability

So, what is the bottom line? Making corporate sustainability itself more sustainable remains a key management challenge, both for larger and smaller firms. Creating durable organizational structures that can withstand the pressures of crisis situations and related cost-cutting efforts is one important way to address this challenge. Such structures have to be integrated with the rest of the organization to be not an add-on, but they also need to have a life on their own. What may even be more important is that corporate leaders and associated Boards need to develop an unambiguous vision for where the firm is supposed to go with its sustainability activities. This puts Board-level engagement with sustainability topics at the very top of the agenda, both for practitioners and academics.

About the Author

Andreas Rasche is Professor of Business in Society at Copenhagen Business School and Visiting Professor at the Stockholm School of Economics. He just released “Sustainable Investing: A Path to a New Horizon” (together with Herman Bril and Georg Kell). More information at: http://www.arasche.com

Photo by Egor Vikhrev on Unsplash