Addressing companies’ low-carbon transition challenges requires diversified investments in environmental initiatives

Abstract

The energy, utilities, industrial, and material sectors are crucial suppliers of essential goods and services, but their business operations are among the largest sources of anthropogenic greenhouse gas emissions. Consequently, companies in these sectors play a pivotal role in the low-carbon transition and face substantial stakeholder pressure to manage their transition risks and reduce their environmental impact. Here, we argue that effective responses to transition challenges require diversifying investments in adaptation and mitigation initiatives across a broad range of activities and goals. Analysing financial and nonfinancial data from a global sample of publicly traded companies, we find that those who extensively diversify their investments are better able to reduce their emissions over time. Diversification also reduces carbon pricing risk, thereby lowering exposure to transition risks, under several climate policy scenarios. Our findings provide empirical evidence that business leaders in critical sectors for the low-carbon transition should incorporate well-diversified investments in adaptation and mitigation initiatives into their sustainability strategies to manage interconnected transition challenges.