Enterprise's strategies to improve financial capital under a climate change scenario – evidence of the leading country

The study investigates whether and how firms' climate risk-mitigation strategies influence their market valuation, as reflected in stock prices, and whether these effects depend on firms' income. Motivated by escalating climate risks, policy uncertainty (including the U.S. withdrawal from the Paris Agreement during 2016–2021), and the need for private-sector financing of mitigation, the authors posit that investors may reward firms adopting climate-resilient strategies. They further hypothesize that developing an eco-surplus culture—societal values favoring nature protection—can enhance investor support for corporate mitigation, but that investors still prioritize firms' income-generating capacity. The research focuses on U.S. S&P 500 firms to draw lessons from a leading economy and a deep, free-capital market where stock prices reflect investor beliefs.

Prior work has extensively examined external climate-related factors—such as weather shocks, climate news, disclosure regulations, and policy changes—and their impacts on firm performance and valuation. Studies identify various corporate climate strategies (e.g., cap-and-trade participation, supply chain approaches) and stages of climate response across industries (indifferent, beginner, emerging, active). Evidence suggests investors increasingly price climate responsibility, consider stranded asset and ethical risks, and respond to disclosures and regulations. However, there is comparatively less focus on how internal corporate mitigation actions—like producing environmental products, investing in environmental projects, and using renewable energy—directly relate to firm valuation, especially under varying income levels. This gap motivates the present analysis.

Data: The authors use Refinitiv data (accessed January 17, 2023) for 178 S&P 500 companies from 2016–2021. Sector composition (GICS): Consumer Staples 15.73%, Energy 12.36%, Industrials 39.89%, Materials 15.73%, Utilities 16.29%. Key variables: - Outcome: AverageStockPrice (annual average stock price, USD). - LogNetIncome: log of net income before extraordinary items. - LogCO2: log of total CO2 emissions (direct + indirect per GHG protocol), metric tons. - EnvironmentalProducts (binary): firm reports at least one product/service designed with positive environmental effects or marketed as solving environmental problems. - EnvironmentalExpendituresInvestments (binary): firm reports environmental expenditures or proactive environmental investments. - RenewableEnergyUse (binary): firm uses or purchases renewable energy for own use (including converting waste to energy for own use). - Controls (in robustness checks): LogNumberofEmployees; sector dummies (ConsumerStaples, Energy, Industrials, Materials, Utilities). Model construction and estimation: Guided by the mindsponge mechanism, the authors hypothesize a negative association between CO2 emissions and stock price, and positive associations for income and mitigation strategies, with mitigation effects conditional on income. They estimate four Bayesian models using Hamiltonian Monte Carlo via the bayesvl R package, each with 4 chains, 2000 warm-up iterations, and 5000 sampling iterations: - Model 1: AverageStockPrice ~ LogNetIncome - Model 2: AverageStockPrice ~ LogCO2 + EnvironmentalProducts + RenewableEnergyUse + EnvironmentalExpendituresInvestments - Model 3: AverageStockPrice ~ LogNetIncome + LogCO2 + EnvironmentalProducts + RenewableEnergyUse + EnvironmentalExpendituresInvestments - Model 4: AverageStockPrice ~ LogNetIncome + EnvironmentalProducts + LogNetIncome*EnvironmentalProducts + EnvironmentalExpendituresInvestments + LogNetIncome*EnvironmentalExpendituresInvestments + RenewableEnergyUse + LogNetIncome*RenewableEnergyUse + LogCO2 + LogNetIncome*LogCO2 Priors and robustness: Uninformative priors (mean 0, SD 10) are used initially. Informative priors reflecting belief in positive mitigation impacts are set to mean 5, SD 0.5; for LogCO2 a negative prior mean −8, SD 8 (scales aligned with data). Robustness includes adding controls, using informative priors, and replacing the outcome with a size-adjusted metric (log of average stock price divided by number of employees and shares). Model fit is assessed via PSIS-LOO; convergence via Rhat and effective sample size, along with trace, autocorrelation, and Gelman-Rubin-Brooks diagnostics.

- Model comparison: Bayesian stacking and Pseudo-BMA weights consistently favor Models 3 and 4 (e.g., stacking weights: Model 3 ≈ 0.32, Model 4 ≈ 0.67). PSIS-LOO indicates good fit (Model 4 Pareto k < 0.5). - Convergence: All models show Rhat ≈ 1 and sufficient n_eff (>1000), stable trace plots, and rapidly decreasing autocorrelation. - Model 3 (no interactions; uninformative priors, without controls): • LogNetIncome positively associated with AverageStockPrice (mean ≈ 18.04, SD ≈ 2.27). • Mitigation strategies positively associated: EnvironmentalProducts (≈ 9.83, SD ≈ 4.94), EnvironmentalExpendituresInvestment (≈ 13.40, SD ≈ 4.78), RenewableEnergyUse (≈ 9.58, SD ≈ 5.02). • LogCO2 negatively associated (≈ −12.29, SD ≈ 1.35). • 89% HPDIs lie entirely on the expected sides, indicating reliable associations. With controls added, most effects remain, though EnvironmentalProducts becomes weaker. - Model 4 (with interactions; uninformative priors): • Direct effects of mitigation variables are not significant (SDs exceed absolute means) when interactions with income are included. • Positive interaction effects with income: Income*EnvironmentalProducts (mean ≈ 0.82, SD ≈ 0.55), Income*EnvironmentInvestment (≈ 0.91, SD ≈ 0.56), Income*RenewableEnergy (≈ 0.72, SD ≈ 0.56). HPDIs lie on positive side, indicating reliable positive moderation by income. • LogCO2 strongly negative (mean ≈ −14.76, SD ≈ 0.27). Income*CO2 interaction negligible (mean ≈ 0.11, SD ≈ 0.27). • With informative priors, positive interaction effects persist and direct positive effects of mitigation become significant; adding controls leaves most effects robust, though the Income*EnvironmentalProducts interaction becomes less reliable. - Size sensitivity: Replacing the outcome with a size-adjusted stock price measure alters some results, suggesting sensitivity of mitigation effects to company size (employees and shares). Overall: Income directly boosts stock price; mitigation strategies are rewarded by investors, especially for higher-income firms; greater CO2 emissions reduce valuation independently of income.

Findings indicate that investors value firms' climate risk-mitigation actions—renewable energy use, environmental products, and environmental investments—yet still prioritize the firm's income generation. From a mindsponge perspective, investor decisions reflect core monetary values while increasingly integrating eco-surplus values. The negative association between CO2 emissions and stock price suggests investors penalize carbon-intensive firms. These dynamics support a bottom-up pathway to complement policy and public finance shortfalls: foster an eco-surplus culture among investors and enterprises. Growing awareness of climate risks, stakeholder pressures, and the pursuit of carbon efficiency can reduce portfolio risk and align with ethical and fiduciary considerations. However, effective climate communication remains challenging due to the invisibility of causes, distant impacts, limited direct experience, and perceived costs of mitigation. Enhancing access to climate information for investors and executives, and leveraging education and community engagement, can strengthen support for climate-resilient business models and mobilize private finance.

The study demonstrates that, in the U.S. market during 2016–2021, firms' income strongly and directly increases stock prices, corporate mitigation strategies are associated with higher valuation (particularly for higher-income firms), and CO2 emissions reduce valuation. These results imply that pursuing green strategies is a necessary path for firms seeking market growth, whereas reliance on carbon-intensive technologies risks declining market value. The authors advocate building an eco-surplus culture to motivate investor and corporate actions, and promoting information access, education, and community approaches to accelerate climate-aligned behaviors and financing. Future research should extend the time horizon, test across countries, and probe how company size influences the perceived valuation effects of mitigation actions.

- Time frame limited to 2016–2021, representing a short-to-medium business cycle; results should be generalized cautiously and longer periods examined in future research. - Sample restricted to U.S. S&P 500 firms; external validity to other countries and firm types requires testing. - Data nuances: 74 negative income observations (approximately 8.5% of data points); missing data under 10%, unlikely to materially affect predictions but still a consideration. - Sensitivity to firm size: Robustness checks using size-adjusted stock price suggest that the effects of mitigation strategies on valuation may depend on company size (employees and shares). Further study of size effects is recommended.