Essays on environmental, social, and governance (ESG)

Abstract

This thesis consists of three essays on environmental, social, and governance (ESG). The research endeavors to examine the effects of financial frictions with environmental, social, and governance considerations on socioeconomic and sustainable development. This thesis project bridges multiple areas, including financial inclusion, environmental regulation, and climate transition, all with a shared objective of promoting inclusive and sustainable development. The goal of my research is to make a contribution to the advancement of inclusive sustainability by exploring three primary themes. First, I aim to investigate the impact of attention constraints on impeding financial inclusion. Second, I aim to examine the unintended externalities of environmental regulation along the supply chain. Third, I aim to explore the unintended effects of corporate divestiture driven by green shareholders. By adopting clean and causal empirical approaches, and leveraging high-dimensional datasets, this research project aims to enhance the understanding of ESG development, thereby seeking support to advance sustainable and inclusive growth in business. The first chapter sheds light on a novel attention-based mechanism that can hinder financial inclusion for individuals from disadvantaged backgrounds. We find evidence of this mechanism in detailed proprietary loan screening data, where we can measure the attention received by each applicant. Consistent with theoretical predictions, loan officers exert less effort reviewing loan applications for disadvantaged individuals and reject such applications more frequently than is justified by the applicants’ credit quality. Our findings imply that, in human-based decision processes, organizational arrangements or technologies that relax attention constraints may help improve inclusion and promote diversity. Our findings also suggest that the rise of fintech may—if properly used—promote financial inclusion through pre-processing of applicant information and relieving decisionmakers of attention bottlenecks. Moving beyond our immediate setting, many high-stake decisions are made by humans, and key decision-makers—such as court judges, college admissions officers, and so on—are often very busy. Therefore, while our study focuses on the impact of attention constraints on the allocation of financial resources, we suspect that similar mechanisms are at play in other settings that are potentially more consequential. The second chapter examines how a regional environment regulation shapes the emission policy of firms that are not regulated by the regulation along the supply chain. Exploiting the NOx Budget Trading Program (NBP), we document that the NBP has an unintended spillover effect on the toxic chemical emissions of non-NBP-regulated manufacturing plants via the pass-through of higher energy input prices. Our analyses show that high energy-consuming manufacturing plants of public firms release more emissions into the air, especially those harmful to human health, after NBP implementation relative to the control group. This result can be explained by the decrease in abatement activities associated with the costly material and process modifications. We also find corroborative evidence to our hypothesis that constrained myopic manufacturers that are not regulated by the NBP cut corners by reducing costly abatements to absorb the NBP-induced increase in energy cost, which engenders a negative impact on air quality in the vicinity of those plants. Importantly, underprivileged communities in the neighborhoods of the non-NBP-regulated high energy-consuming manufacturing plants in the NBP-regulated states largely bear the cost of more emissions. By taking negative externality and its distributional effects into account, the NBP could have achieved its intended goal of improving the environment and human health more fairly. This chapter thus has important policy implications for the better formulation and implementation of future regional emission regulations. The last chapter provides novel evidence on how green shareholder pressure can propagate emissions to asset owners who are subject to fewer oversights. Using shareholder proposals, engagement, and activism campaigns, we find publicly listed energy firms divest pollutive assets and lead to an increase in emissions at the sold plants if the acquirers are private firms. Specifically, such emission increases are driven by cutting down costly emission abatement activities and are concentrated in plants bought by private independent buyers, sold by firms that have started environmental reporting, or located in areas with low environmental regulation risks. Overall, we find evidence that green shareholder oversight plays an important role in the allocation of pollutive real assets and the internalization of environmental externalities. This chapter provides significant implications for advancing the transition to a low-carbon economy. There is a surge in discussions on addressing environmental and climate risks, for example, the Securities and Exchange Commission (SEC) has proposed climate-related disclosures. The conclusions drawn from this chapter indicate that SEC disclosure pertaining to emissions reduction should not only include information on the reduction amount and rates, but also should place greater emphasis on the methods employed by firms to achieve these emissions reductions such as the portion of reductions resulting from divestiture. Such reporting regime will provide a more refined picture of how a firm is achieving its emissions reduction goals and its potential emission spillover effects along the transactions. Furthermore, while the current disclosure requirements only apply to public firms, the study suggests such mandatory disclosure would further exacerbate the imbalance in oversights between the public and private markets and hinder the process of sustainability. Overall, the analysis highlights the importance of how shareholder oversight affects corporate prosocial activities and internalizing environmental externalities. As many shareholders are stepping in the right direction to achieve net-zero GHG emissions, greater oversights from other stakeholders (such as government, creditors, customers, and employees) are called for alliance in order to advance the process of mitigating climate change to ensure that efforts made by green blocs don’t go in vain.