How firms can make or break the green transition

In line with commitments under the Paris Agreement, many countries are aiming for net zero carbon emissions by 2050. This green transition will require massive corporate investments in cleaner technologies to reduce firms’ carbon footprint. Against this background, large companies like Apple, BP, and British Airways have recently committed to climate neutrality. In emerging markets, some firms have started to do the same. Examples include PKN Orlen in Poland and Tesco Hungary. Unfortunately, not all companies, especially smaller ones, are able or willing to invest in cleaner technologies. In our recent working paper, we explore how organizational constraints can hold back the green transition.

Our analysis combines granular data on more than 11,000 firms across 22 emerging markets. We first show that firms differ widely in their ability to access external funding and in the quality of their green management practices (Martin, Muûls, de Preux, and Wagner 2012). We then explore whether firms with better access to credit and those with stronger green management invest more to reduce their environmental and climate footprint. We also assess to what extent these investments indeed help firms to cut greenhouse gas emissions.

An initial analysis confirms that credit constraints correlate negatively with green investments, whereas green-management quality correlates positively with such investments. However, correlation does not imply causation and it is clear that past green investments may influence green management practices or credit constraints — rather than the other way around. To establish causality, we take an “instrumental variables” approach in which we use variables that affect credit constraints and green management — but not (directly) green investments or subsequent emissions. We follow two approaches here.

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First, we exploit spatial variation in credit constraints across towns and cities. The supply of bank credit tightened significantly in emerging Europe after the global financial crisis, and in particular after the 2011 regulatory stress tests by the European Banking Authority (Gropp, Mosk, Ongena, and Wix 2019). The deleveraging varied greatly across banks and therefore across localities, depending on which banks operate branches where. Using data on the network of bank branches combined with bank balance sheet information, we construct local proxies for credit tightness in the direct vicinity of firms.

Second, we assume that management practices are at least partly determined by knowledge diffusion that varies from area to area. We expect, and indeed find, that managers who themselves experience extreme weather events, or are informed about such events in their region, are more likely to be concerned about climate change and the environment. They will therefore be more amenable to green management practices. Hence, exposure to weather events becomes an exogenous driver we can use to explore the causal effect of management practices on green investments.

This instrumental variables approach confirms our earlier results: credit constraints and green management significantly affect the likelihood of green investments (figure 1). Credit constraints hinder most types of green investment, particularly those that require higher investment amounts, such as machinery and vehicle upgrades; improved heating, cooling, or lighting; and green energy generation on site. They do not significantly reduce the likelihood of investing in air and other pollution control or energy efficiency measures, potentially due to the “low-hanging fruit” nature of such investments. Firms with good green management practices, on the other hand, are more likely to invest in all types of green investment, with the effect larger for those more typically thought of as green : waste and recycling, energy or water management, air and other pollution controls, and energy efficiency measures.

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Figure 1. Firm-level credit constraints, green management, and green investments

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