Investors often react more favorably when a company directly works to mitigate greenhouse gas emissions directly through operational changes, like sourcing its electricity needs from renewable resources.
BLOOMINGTON, Ind. – When companies announce plans to use a certain percentage of renewable energy, address greenhouse gas emissions or other environmental, social, and governance initiatives, they presumably present a commitment to these issues and a desire to build trust with stakeholders.
But whether a firm is meeting ESG expectations of investors, clients, and other constituents often depends on how they act to mitigate the issue, whether it is doing so directly or by pursuing alternatives such as purchasing carbon offsets, according to research by Donald Young, assistant professor of accounting and a Blanche “Peg” Philpott Faculty Fellow at the Indiana University Kelley School of Business.
Donald Young
Since joining the Kelley School in 2017, Young has been an author of three journal articles about how companies’ ESG efforts and goals are viewed, and how they relate to market value.
“Commitment is a common theme in business and social psychology research, and it is typically characterized as an enduring and ongoing action for a cause, a relationship that exists over time or a desire to maintain a valued and stable relationship,” Young wrote in the journal Accounting, Organizations and Society. “A Google search for phrases like ‘our ESG commitments’ or ‘our ESG initiatives’ yields hundreds of corporate statements about ESG commitments and initiatives.
“The results of the query raise a valid question, do investors expect a perpetual commitment, finite initiatives, or both?”
In his research, Young generally has found the former to be the case. For example, investors often react more favorably if a company directly works to mitigate greenhouse gas emissions directly through operational changes, like sourcing its electricity needs from renewable resources such as wind turbines, rather than through an indirect means.
“When the firm’s strategy emphasizes purchasing offsets, participants view the firm as less socially and environmentally responsible and assign a lower value to the firm compared to when the firm’s strategy emphasizes making operational changes,” Young and his colleagues wrote in their paper, “The Influence of Firms’ Emissions Management Strategy Disclosures on Investors’ Valuation Judgements,” published in Contemporary Accounting Research.
“Both our theory and empirical findings suggest that investors expect that ‘dirtier’ firms should clean up their own operations before looking to invest in external sustainable activities,” they added.
TAMPA, FL/ May 8, 2024 — 
