NEW YORK, NY – As the number of companies with established carbon reduction targets increases, investors face challenges in evaluating their credibility and monitoring their progress. The Wall Street Journal reports that two-thirds of S&P 500 companies have established some sort of target for carbon reduction. However, the data disclosed by these companies regarding their net-zero paths are inconsistent, and different industries follow different paths to net zero. This makes it challenging to assess the credibility of companies' actions to reduce their carbon footprint. A new study from Columbia Business School sheds light on the credibility of carbon reduction pledges and the factors that impact the market's response to them. In an analysis of the net-zero pledges of 69 oil and gas companies, Professor Shivaram Rajgopal finds that companies producing more hydrocarbons are more likely to make formal pledges to cut emissions.
The study, An Analysis of Carbon Reduction Pledges of the U.S. Oil and Gas Companies, offers important new insight for how to evaluate and verify net zero pledges. Rajgopal and the research team show that investors are paying close attention to the pledges that oil and gas companies are making. The research finds that stakeholders consider companies less credible when they make pledges to achieve net zero with overly long timelines, have not established a board-level committee to oversee their emission goals, or do not specifically tie management compensation to emission reductions. These companies experience a drop in stock price.
"Making net-zero commitments is an important first step, but it's not enough," said Shivaram Rajgopal, Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing at Columbia Business School. “Without clear oversight and accountability measures, these commitments may not hold up under closer inspection. Investors need to be vigilant in assessing the credibility of these pledges to avoid being misled by empty carbon pledges."
The research team, including Southern Methodist University Professor Hemang Desai, New York University Professor Pauline Lam, and University of Houston Professor Bin Li, analyzed the quality of net-zero pledges among 69 exploration and production oil and gas companies. Eighteen companies committed to net-zero carbon targets, 14 announced significant emissions cuts no earlier than 2030, and the remaining 37 companies announced no carbon reduction pledge at all. To determine the quality of the pledges, researchers focused on three questions: Was the pledged net-zero target after 2030?; Did the company establish a board-level committee to oversee the progress towards its stated emission goals?; and Is the emission reduction goal tied to management compensation? Subsequently, the researchers analyzed the two-day market returns following the 32 emission-cutting announcements to determine the market reaction to the announcements. Finally, to determine the carbon footprint of the companies, the researchers used data from the Capital IQ database to determine the total gas equivalent production for both the oil and gas produced by the firm each year.
- Pledges to achieve net zero after 2030 are associated with more negative market reactions than pledges to achieve the target by 2030. This suggests that investors view pledges with long timelines as less credible.
- When BlackRock invests in a company, that company is more likely to be committed to reducing emissions.
- On average, the market reacts more negatively to net-zero climate pledges.
"Without effective oversight and credible plans for achieving carbon reduction targets, investors are left to determine the credibility of carbon reduction plans on their own,” said Professor Rajgopal. “When the SEC adopts its new climate-risk disclosures, it will help standardize the assessment of carbon transition plans, which could help investors better assess the credibility of carbon transition plans. For now, our study provides a framework for investors to use in evaluating if these pledges check out.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit business.columbia.edu.