Does it pay to be science‐based green? The impact of science‐based emission‐reduction targets on corporate financial performance

Abstract

AbstractThe number of companies with highly ambitious carbon emission targets is increasing rapidly. So‐called science‐based emission‐reduction targets (SBTs) are aligned with the aim of the Paris Climate Agreement to limit global warming to below 2°C and preferably to 1.5°C. These voluntary corporate emission targets are substantially more challenging than companies’ prevailing reduction objectives, because climate science guides the target setting. By 2021, more than 2200 companies had publicly engaged in SBTs, covering more than a third of the global market capitalization. The number of participating firms has essentially doubled every year since the first SBTs in 2015. Despite this increased empirical relevance, the impact of SBTs on firm outcomes remains unclear. Notably, their effect on corporate financial performance (CFP) is unknown. The present study addresses this research gap by empirically examining the relationship between corporate carbon emission performance (CCP) and CFP of firms with SBTs from 2015 to 2020. The cross‐country panel comprises 2014 observations of 465 firms. Our findings indicate a positive association between CCP and CFP for firms engaging in SBTs, implying a positive relation between decarbonization efforts and financial results. We thereby advance research on the important question of when it pays to be green. On a practical level, we provide transparency on the effects of SBTs for managers and climate‐change advocates.