Mitigating climate change: A role for regulations and risk‐taking

Abstract

AbstractWhy do some firms engage in actions to reduce climate change? We propose two counterintuitive mechanisms: high levels of regulation and a firm's increased tolerance for risk. Drawing from insights on how institutional contexts constrain, and enable, prosocial firm behavior, we argue that external pressures, amplified internally by a firm's higher tolerance for risk, increase the likelihood that a greenhouse gas (GHG)‐intensive firm will engage in climate change actions that exceed regulatory requirements. An analysis based on 7,101 observations of U.S. publicly traded firms during the 2013 to 2015 period supports our hypotheses. Our models show high overall prediction accuracy (88.6%) using an out‐of‐time holdout sample from 2016. Moreover, we find that firms that have exhibited environmental wrongdoing are also more likely to engage in beyond‐compliance activities, which may be a form of greenwashing. Thus, more formal and informal regulatory oversight has the potential to spur positive environmental actions. This has implications for a firm's corporate social responsibility actions as well as for climate change regulatory policy.