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

Climate change poses significant risks to ecosystems and human well-being, necessitating urgent action. Reducing greenhouse gas (GHG) emissions and adopting climate-friendly technologies at the corporate level are crucial mitigation strategies. The Paris Agreement underscores the global commitment to limit warming well below 2°C. However, a major challenge is financing climate-resilient projects, particularly with declining venture capital in this sector and fiscal constraints faced by many governments. The private sector's role in allocating funds for climate risk mitigation is therefore paramount. This study focuses on how corporations finance their climate-resilient strategies, particularly during a period (2016-2021) marked by the US withdrawal from the Paris Agreement under the Trump administration. Despite this, climate-resilient companies saw stock market rewards, highlighting the importance of investor perception and behavior. The research hypothesizes that improving climate-responsible attitudes can be achieved by cultivating an 'eco-surplus culture' – a societal value system prioritizing nature protection. This study utilizes the Bayesian Mindsponge Framework (BMF) to analyze the interplay between firms' climate risk mitigation strategies and their stock values, using data from 178 American S&P 500 companies.

Existing research examines various aspects of corporate climate strategies, including different configurations of climate strategies (Kolk and Pinkse, 2005) and the classification of industries based on climate risk responses (Jeswani et al., 2008). Studies have also investigated the impact of external factors like weather, climate news, and policies on firms' market values (Lucas & Mendes-Da-Silva, 2018; Addoum et al., 2020; Faccini et al., 2021). However, there's a gap in understanding the direct link between firms' internal mitigation strategies and their valuation. The authors cite several studies focusing on the market's response to climate-related information and actions, including the impact of stakeholder pressures (Cadez et al., 2019), the role of investors in driving low-carbon transitions (Ramelli et al., 2018; Carney, 2015; Morgado & Lasfargues, 2017), and the challenges of climate change communication (Moser, 2010). The concept of 'eco-surplus culture' is introduced, drawing from existing work on cultural values (Huntington, 2000; Harrison, 2000; Matsumoto & Juang, 2016) and its influence on socio-economic development (Nguyen & Jones, 2022). This study aims to fill the gap by directly examining the relationship between firms' internal mitigation efforts and their market valuation.

The study uses panel data from the Refinitiv database for 178 American companies listed in the S&P 500 from 2016 to 2021. The dataset includes variables like average stock price, net income, total CO2 emissions, indicators of environmental product lines, environmental investment, renewable energy use, number of employees, and industry type. The researchers employ the Bayesian Mindsponge Framework (BMF) for analysis. The BMF incorporates mindsponge theory, which examines how information processing influences decision-making. Four models are constructed, ranging in complexity from a simple model focusing on net income to a complex model including interactions between income and climate mitigation efforts. The Bayesian inference is used to estimate the model parameters using the Hamiltonian Monte Carlo algorithm. Model comparison is conducted using three methods: Pseudo-BMA without Bayesian bootstrap, Pseudo-BMA with Bayesian bootstrap, and Bayesian stacking. The goodness of fit is assessed using the Pareto smoothed importance-sampling leave-one-out cross-validation (PSIS-LOO) test, and convergence diagnostics are performed to ensure reliability. Uninformative priors are initially used, followed by informative priors to assess robustness. Control variables are added for further robustness checks, and sensitivity analysis is performed by using a relative stock price adjusted for company size (based on employee and share numbers).

Model 3 and Model 4 were found to be the most predictive models. Key findings from Model 3 indicate a positive relationship between company income and stock price. Climate risk mitigation strategies (environmental products, investments, and renewable energy use) also show positive associations with stock prices. CO2 emissions negatively impact stock valuation. Model 4, which incorporates interactions between income and mitigation strategies, reveals that the positive effects of mitigation efforts are conditional on company income. In other words, while investors value climate-conscious actions, they still prioritize profitability. The interaction effects between mitigation strategies and income are highly reliable, with their 89% highest posterior density intervals (HPDIs) entirely on the positive side of the x-axis. The results remain robust even after adding control variables for employee count and industry type and when using informative priors. However, the interaction effect of 'EnvironmentalProducts' and income on stock price shows some sensitivity when control variables are included. The impact of climate-risk mitigation on average stock price shows sensitivity to company size (as proxied by employee and share numbers).

The findings highlight the importance of both financial performance and climate-responsible actions in shaping a company's market value. Investors appear to favor companies with robust mitigation strategies, but profitability remains a key driver of investment decisions. This supports the mindsponge perspective, where monetary benefits initially hold priority, with eco-surplus values emerging as a complementary factor influencing investor choices. The study's results underscore the potential of a 'bottom-up' approach to climate change mitigation, where increased awareness and the development of eco-surplus cultural values among investors and corporations can compensate for financial and legislative limitations. The observed positive market response to climate-resilient actions suggests that a shift towards sustainable business practices can be financially beneficial. This research contributes to the understanding of the interplay between corporate climate strategies, investor behavior, and market valuation.

This study demonstrates a positive association between corporate climate change mitigation strategies and stock prices, conditional on company income. The findings emphasize the growing importance of environmental, social, and governance (ESG) factors in investment decisions. The findings support the idea of fostering an eco-surplus culture to promote climate action. Future research should extend the time frame and geographical scope of the study, investigate further the influence of company size on the observed relationships, and explore the role of different investor types and their varying responses to climate-related information.

This study has several limitations. The relatively short time frame (2016-2021) limits the generalizability of the findings to longer-term business cycles. The focus on American S&P 500 companies restricts the generalizability to other countries and company sizes. The presence of missing data points (8.5% negative income values) could potentially influence the results, although this percentage is not deemed overly impactful. Furthermore, sensitivity analysis reveals that the effects of climate-risk mitigation strategies on average stock price are sensitive to company size, implying a need for further investigations on this effect.