Firms’ Environmental Performance in Times of Crisis

IMF Blog, October 26, 2020

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Examines how firms’ environmental performance responds to episodes of financial and economic stress, with implications for the COVID-19 crisis.
Considers two opposing forces during the pandemic:
- Increased awareness of environmental risks and shifts in consumer, corporate, and investor behavior that could accelerate the low-carbon transition.
- Financial weakening of firms and heightened economic uncertainty that could reduce investments in long-horizon, capital-intensive green projects and slow the transition.

Sample: large international sample of listed firms over the period 2002 to 2019.
Financial-constraint proxies used include firm size, credit-rating status, and dividend-paying behavior (smaller, unrated, and non–dividend-paying firms are treated as more likely financially constrained).
Main measure of environmental performance: a score based on various key performance indicators, such as resource usage, emissions reductions, and product innovation.

Financially constrained firms exhibit significantly weaker environmental performance than unconstrained firms.
For firms that do not pay dividends, are not rated, or are smaller, the environmental performance score is, on average, 10 to 30 percent lower than the score of large, dividend-paying, or rated firms.
A sudden jump in global financial stress and uncertainty—comparable to the average level that prevailed in the first half of 2020—would lead to a drop in firms’ environmental performance, reversing gains made over the last decade.
The pre-shock environmental performance level is not regained even three years after the shock.
When economic output declined, firms’ environmental performance declined as well.

Absent climate policy actions, tighter financial constraints and adverse economic conditions can be detrimental to firms’ environmental performance, reducing green investments and potentially slowing the transition to a low-carbon economy.
To offset deterioration in firms’ environmental performance, it will be crucial to put in place climate policies that alleviate firms’ financial constraints and aid green investment.
In addition to green recovery packages, policies aimed at fostering sustainable finance are important:
- Comparable, consistent corporate reporting on sustainability is needed to enable effective assessment of firms’ environmental performance. Accurate and adequately standardized reporting and disclosure are necessary for investors to determine companies’ exposures to climate-related financial risks.
- Standardization and clarification of what constitutes a sustainable investment fund are needed to instill investor confidence that sustainability labels reflect underlying sustainable investment decisions.
- International cooperation and a collaborative approach to global initiatives are crucial to leverage efforts and avoid fragmentation of sustainable asset markets. The IMF will be contributing to this endeavor.

Source: Firms’ Environmental Performance in Times of Crisis — IMF Chart of the Week (October 26, 2020)