Working Papers
Can Corporate Incentives Deliver Decarbonization?
with Guillaume Coqueret (EM Lyon)
We investigate the energy mix decision in firms with CEO compensation that integrates both financial and environmental incentives. We first investigate the past effect of incentives on decarbonization paths and find a positive impact: carbon intensities do decrease when executive pay is linked to climate metrics. We then propose a theoretical model with two key parameters, namely the elasticity of output with respect to energy and the difference between green and brown energy prices. Calibrated on electricity prices, our results show that the efficiency of incentives to drive decarbonization depends critically on these two inputs. This is evidenced through variations across sectors and geographical zones. Given parameter values estimated from recent data, incentives appear much more compelling and efficient in Europe than in the United States. Nevertheless, reasonable projections indicate that corporate incentives alone will likely not suffice to substantially curb emissions in the medium to long term.
The Anatomy of Decarbonizing Firms
with Guillaume Coqueret (EM Lyon) and Thomas Giroux (ETH Zurich)
We study the firm-level drivers of corporate decarbonization using a global panel combining financial characteristics, balance-sheet indicators, ESG metrics, macroeconomic variables, and firms’ greenhouse gas emissions. Emission trajectories exhibit strong persistence, with past emissions the dominant predictor of future performance. However, firms with larger carbon footprints also display greater abatement potential, creating opportunities for targeted stewardship and capital reallocation. We identify adoption of Science-Based Targets (SBT) as a significant catalyst for emission reductions and provide causal evidence that credible, externally validated climate commitments accelerate decarbonization. We develop machine-learning models that outperform heuristic benchmarks in forecasting one-year-ahead abatement, especially in hard-to-abate sectors, and we show that such forecasts can help further curtail portfolio-level emissions. Nevertheless, our results indicate that, given current emission trends in the cross-section of firms, building portfolios with net zero objectives for 2050 remains an open challenge.
Expanding the Zoo: The Circularity-Factor
with Maximilian Göbel (Bocconi) and Claudio Zara (Bocconi)
The Circular Economy (CE) is a framework that lies within the broader environmental, social, and governance (ESG) paradigm, yet it more directly reflects a self-sustaining production process that limits non-reusable waste and reliance on non-renewable inputs. As economies transition toward greener and more sustainable systems, investors may seek to hedge risks associated with this transition. We propose the circularity factor (CF), a hedging portfolio that buys stocks with high circularity scores (CS) and shorts stocks with low CS. Controlling for firm size, we find CF to be profitable in European markets but not in the U.S. market. CF dynamics are not explained by prominent factor models, and CF stands out among the “factor zoo” in pricing the cross-section of European stock returns.
Work in Progress
The Hidden Premium of 24/7 NetZero Portfolios
Selective Listening: Detecting Analyst Bias in Earnings Calls Using Open Source Large Language Model