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Foreign Institutional Investors, Legal Origin, and Corporate Greenhouse Gas Emissions Disclosure

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Abstract

The disclosure of corporate environmental performance is an increasingly important element of a firm’s ethical behavior. We analyze how the legal origin of foreign institutional investors affects a firm’s voluntary greenhouse gas emissions disclosure. Using a large sample of firms from 36 countries, we show that foreign institutional ownership from civil law countries improves the scope and quality of a firm’s greenhouse gas emissions reporting. This relation is robust to addressing endogeneity and selection biases. The effect is more pronounced in firms from non-climate-sensitized countries, for which the gap between firms’ environmental standards and investors’ environmental targets is potentially larger, and in less international firms. Firms with a higher level of voluntary greenhouse gas emissions disclosure also exhibit higher valuations.

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Notes

  1. The GHG Protocol is a standardized framework for the measurement of GHG emissions, introduced by a private initiative aimed at making reported GHG emissions comparable.

  2. Recognizing that the legal origin has implications for economic outcomes, Liang and Renneboog (2017) show that CSR activity is significantly higher in firms from civil law countries compared to firms from other legal origins. The CSR level in a country represents the tradeoff between shareholder and other-stakeholder interests, which is shaped directly by legal rules and enforcement and, more often, indirectly by a country’s legal traditions through its effect on the implicit contracts between shareholders and stakeholders. While the adoption of CSR in common law countries is mainly shaped by corporate discretion combined with strong judicial mechanisms, in civil law countries it is influenced by explicit (e.g., laws and regulations that protect stakeholder interests) or implicit (e.g., societal preferences) rules that constrain behavior ex ante.

  3. Competing interests among stakeholders create a condition that likely leads to a positive amount of transparency (see Liesen et al. (2015) and Majoch et al. (2017) for empirical evidence).

  4. In a more general context, Gelb and Zarowin (2002) show that firms have incentives to increase price efficiency by voluntarily disclosing information. In a CSR framework, Su et al. (2016) find a positive relation between CSR practices and firm performance. Because the effect is more pronounced in less-developed capital markets, they propose a signaling explanation.

  5. Our focus is on studies that examine the economic effects of environmental responsibility. Gillan et al. (2021) provide a survey of studies that examine the corporate finance outcomes of CSR in a broader sense.

  6. However, as discussed in detail below, more disclosure can also impose unwarranted costs on firms, particularly in a climate finance context (Ilhan et al., 2020).

  7. Li et al. (2021) show that foreign institutional investors, in particular those from countries with high social awareness, improve the CSR of Chinese firms as well as the quality of their CSR reporting. A related strand of literature examines the “ideology” of fund managers as an approximation of their norms and values towards CSR (Bolton et al., 2020; Hoepner and Schopohl, 2020).

  8. An open question is whether there exists a separate non-diversifiable information risk factor that is priced in returns. There is currently little theoretical support for such a risk factor (see Beyer et al. (2010) for a detailed discussion).

  9. Pástor et al. (2020) confirm this idea and show that if CSR preferences shift over time, they can become a non-diversifiable risk factor. In turn, firms’ exposures against this risk factor are priced in their cost of capital.

  10. Scope 1 refers to the direct GHG emissions by the firm itself, while scope 2 measures indirect emissions caused by the generation of energy purchased by the firm. Scope 3 refers to other indirect emissions that occur in the firm’s value chain.

  11. Although the CDP was founded in 2000 and started collecting emissions data before 2010, it only started providing data in a comparable form in 2010.

  12. Liang and Renneboog (2017) show that CSR scores are higher in civil law countries than in common law countries, and, on average, that firms with a Scandinavian legal origin exhibit the highest CSR scores. Therefore, it would be interesting to explore which civil law legal origin has the biggest impact on the scope and quality of firms’ GHG emissions disclosure. However, we have very few investors with Scandinavian legal origin in our sample, and thus any spilt sample tests remain inconclusive due to small sample sizes. When we further split the sample into German and French civil law investors, the economic effects on the scope and quality of GHG emissions disclosure are very similar in these two groups.

  13. Our results (not reported) remain qualitatively the same when we omit the U.S. from the sample.

  14. We check the balance of our matching procedure, i.e., how similar the empirical distributions of all control variables are in the treatment and the control groups. These checks are based on numeric summaries as well as jitter and quantile–quantile-plots. The propensity score matching with the best balance is received when we match one-to-three with the nearest-neighbor method for emissions verifications and the CDP score and one-to-one for the integrated disclosure score. This explains the different number of observations (N) across models in Table 7. Our results remain qualitatively similar using alternative matching approaches.

  15. Although the exclusion restriction cannot be formally tested in a selection framework, we implement a “practical” test proposed by Kiviet (2020). Specifically, we include our instrument IND-CTRY-SHARE as an additional regressor variable in the second stage regression. The estimated coefficient is insignificant, endorsing (but certainly not guaranteeing) that IND-CTRY-SHARE can be validly excluded from the second-stage outcome regression.

  16. The coefficients of the multinomial ordered logit model cannot be interpreted as marginal effects, and their magnitudes are not comparable across subsamples (El Ghoul et al., 2016a). Therefore, we again discuss the magnitude of the economic effect of a one-percentage-point increase in the ownership of foreign investors on the odds of having all three emissions scopes verified (or obtaining the highest CDP score).

  17. When we use a dummy variable indicating whether a firm has foreign sales greater than zero instead of the percentage of foreign sales as a proxy for internationalization, the results remain robust.

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Acknowledgement

We thank Arno Kourula (Editor), three anonymous referees, Najah Attig, Narjess Boubakri, Johannes Barg, and Timo Busch  for helpful comments. We appreciate the generous financial support from Canada’s Social Sciences and Humanities Research Council.

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Authors and Affiliations

  1. Faculty of Business Administration, University of Hamburg, Moorweidenstrasse 18, 20148, Hamburg, Germany

    Simon Döring & Wolfgang Drobetz

  2. Campus Saint-Jean, University of Alberta, 8406 Rue Marie-Anne-Gaboury (91 Street), Edmonton, AB, T6C 4G9, Canada

    Sadok El Ghoul

  3. Moore School of Business, University of South Carolina, 1014 Greene Street, Columbia, SC, 29208, USA

    Omrane Guedhami

  4. School of Management and Technology, Leuphana University Lüneburg, Universitätsallee 1, 21335, Lüneburg, Germany

    Henning Schröder

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Table 13 Variable definitions and sources
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Döring, S., Drobetz, W., El Ghoul, S. et al. Foreign Institutional Investors, Legal Origin, and Corporate Greenhouse Gas Emissions Disclosure. J Bus Ethics 182, 903–932 (2023). https://doi.org/10.1007/s10551-022-05289-6

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