Topics ranging from consumer perceptions of sustainability to the value of accounting for carbon were among those examined in a recent research exchange co-hosted by the MSCI Sustainability Institute and researchers at Columbia Business School.
The forum, which brought faculty and doctoral students from Columbia together with researchers from MSCI, followed a similar exchange last year and focused on forging alignment between problems that investment-industry practitioners confront and work coming out of the university.
“We aim to provide a sounding board for academic researchers who are working at the forefront of sustainable finance, by offering insight into the challenges that practitioners face based on our support for participants across capital markets,” explained Linda-Eling Lee, the Institute’s founding director.
Questions that practitioners are currently grappling with include the tie between sustainability factors and the creation of value, the efficacy of shareholder engagement, insight into sustainability in private investment portfolios, and private capital for climate adaptation, she noted. (You can view investors discussing some of the questions they find most pertinent here.)
Here are some highlights from the session.
1. A ‘green ledger’ for carbon accounting
Could you develop a system of accounting for use by companies and other entities to report their progress (or lack thereof) in reducing carbon emissions that mirrors the format of financial accounting? Yes, suggests Stephen Penman, the George O. May Professor Emeritus of Financial Accounting, who is designing one. It includes a balance sheet that compares assets for reducing carbon with liabilities for carbon emissions and a statement resembling an income statement for reporting periodic changes in emissions with explanatory detail. We discussed industries that the ledger might lend itself to (tech companies comes to mind), the benefit of testing the ledger with some actual companies, as well as some of the differences between Professor Penman’s proposal and an accounting framework proposed by the E-Liability Institute that’s designed to measure products’ lifecycle emissions. We also discussed the potential value of accounting in bringing discipline to climate promises, as well as differences between accounting and disclosure. Accounting, suggested Professor Penman, is much more concrete, provided, he noted, that it’s credibly done.
Read the research here.
2. Mandatory corporate sustainability disclosure and ‘regulatory leakage’
Do mandatory safety disclosure requirements lead listed companies to offload responsibility by divesting high-risk assets to privately held firms? That’s the question at the heart of recent research by Lisa Liu, an assistant professor of accounting, who together with co-authors Hans B. Christensen, Mark Maffett, and Wendy Wen has examined changes in the ownership of U.S.-listed mining companies’ following the introduction of mandatory mine safety disclosures in the Dodd-Frank Act of 2010. The researchers estimate that the proportion of unsafe mines owned by listed firms fell 46% between 2002 and 2021, with just over one-quarter (26%) of the drop due to changes in ownership or avoiding investments in new mines (what the researchers term “regulatory leakage”) with the remainder (74%) attributable to actual improvements in mine safety. The findings coincide with a trend among emissions-intensive energy-sector companies to gravitate toward private markets, noted our colleague Abdulla Zaid, who leads MSCI’s research on sustainability and climate investment solutions in private-capital funds. Energy companies accounted for nearly one-fifth (19%) of delisting by companies in U.S. public markets in the six years that ended in 2021, while the energy sector’s share of all initial public offerings trended downward, he noted. We discussed other potential reasons for the offloading of assets by mining companies that may be at play, including commodity price cycles and asset valuations.
3. In the pipeline
Price as a signal for sustainability
Just as consumers use price to infer quality, they also use it to infer sustainability, observe Silvia Bellezza, an associate professor of marketing, and Abdullah Althenayyan, a doctoral candidate in marketing. Discussion centered on their finding that consumers perceive both cheap and luxury products alike as less sustainable than moderately priced alternatives.
Assessing the additionality of renewable energy certificates
Utilities across the U.S. can purchase renewable energy certificates (RECs) to meet state mandates requiring power producers to generate a portion of their energy from renewable sources, but does purchasing RECs contribute to the overall demand for electricity generated from renewables? We discussed with Shraman Sen, a doctoral candidate in accounting, his research into what, if anything, the price of RECs conveys about their additionality.
Proxy voting and politics
Do U.S. state pension funds vote differently on executive compensation depending on the partisan political leaning of their electorate? That’s the question asked by Shivaram Rajgopal, the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing and chair of the Accounting Division, who together with co-authors Dhruv Aggarwal and Lubomir Litov is examining the latest disclosures on how funds voted their proxies on so-called say-on-pay proposals.