Massive investment is required to achieve the ambitious goal of the Paris Agreement to ensure that the rising global temperature in this century is kept well below 2°C above the preindustrial level (IPCC, 2018). Although the literature on carbon accounting is growing, studies on the valuation impact of firms’ carbon abatement investment (CAI) are scarce, and the influence of country-specific climate policies is largely underexplored.
We draw on both the benefit and cost perspectives of the resource-based view (RBV) to predict this relationship. The benefit perspective of the RBV suggests that companies that engage in CAI can build heterogeneous and vital resources and unique capabilities and develop an economic competitive advantage, which will be positively valued in the capital market. However, the cost perspective highlights the fact that the adoption costs of CAI can be extremely high, and the aforementioned benefits may be accumulated gradually and take multiple years to realise. CAI may rule out other potentially profitable investment opportunities and thus jeopardise firm value. We predict that investors’ perceptions of the net benefits of CAI are contingent on national climate policies. We argue that in an institutional setting that penalises emitters and mandates carbon reduction, CAI would add value to firms by generating more valuable resources and capabilities at lower costs (Porter & van der Linde, 1995; Walley & Whitehead, 1994). In contrast, in an institutional context with lax carbon regulations, CAI would be perceived as an unnecessary allocation of resources because it generates too few benefits to justify its costs and thereby reduces firm value. We, therefore, expect the valuation effect of firm CAI to vary in different institutional contexts, as different government climate policies have the capacity to alter the net benefits of CAI made by a company.
Based on a comparative analysis of data from the US, the UK, and Australia, we find that CAI is viewed as value-destroying by investors in countries that do not have a stringent climate change policy. In contrast, CAI enhances firm value in jurisdictions that implement such policies. Additional analyses show that investors also consider the characteristics of CAI (i.e., the size and payback period) and the act and extensiveness of voluntary CAI disclosure when evaluating firm value. Our findings fill important gaps in the literature and have critical implications for policymakers, investors, managers, and other stakeholders who are responsible for the transition to a carbon-neutral economy.
Link to publication in EAR: https://www.tandfonline.com/doi/abs/10.1080/09638180.2021.1916979?journalCode=rear20