Tutorial 4:1) Firms can engage in greenwashing through their divestment strategies. Discuss. Flashcards
What is the motive to divest pollution?
STRATEGIC TRANSFER OF OWNERSHIP OF POLLUTIVE ASSETS FROM FIRMS FACING STRONG EXTERNAL ENV PRESSURES TO THOSE FACING WEAKER PRESSURES (OR ARE BETTER AT DEALING W PRESSURES) –> divestitures allow sellers to earn higher returns from offloading pollutive assets to less scrutinised firms w/o actually reducing pollution levels by divesting themselves of env liabilities e.g. via improving their own ESG (esp env) ratings & reducing compliance costs associated w env regulations, permits & monitoring requirements which improves operational efficiency –> false signal of strategic shift towards reducing env damage –> not driven by genuine efforts to reduce pollution or commitment to long-term sustainability but to portray a more env friendly image to enhance its reputation among investors & stakeholders (GREENWASHING).
What is the evidence of firms engaging in greenwashing?
1) NO REDUCTION IN POLLUTION LEVELS UPON DIVESTMENT OF POLLUTIVE ASSETS.
2) LACK OF POLLUTION REDUCTION NOT DUE TO TECH OBSOLESCENCE OR INVESTMENT IN GREENER PLANTS –> i.e. divesting firms not necessarily replacing these assets w more environmentally friendly alternatives or implementing pollution-reducing tech.
What are the 2 key determinants of pollutive plant reallocation when firms are greenwashing?
1) POLLUTION LEVEL –> firms more likely to divest asset if more polluting –> e.g. to mitigate regulatory challenges or reputational concerns associated w operating highly pollutive plants –> sellers’ cumulative abnormal returns (CAR) around announcement of divestitures of pollutive assets significantly higher
when divested plant is more pollutive –> buyers of pollutive assets gain by paying discounted price.
2) ESG (Environmental, Social & Governance) Risk Incidents –> firms more likely to divest pollutive assets following exposure to ESG risk incidents, particularly those related to env risks –> e.g. pollution violations, env accidents, or non-compliance w environmental regulations –> companies facing public scrutiny due to env risks may choose to divest pollutive assets as strategic response to manage reputational damage & address stakeholder concerns.
What are the characteristics of buyers of divested pollutive assets & why might they contribute to greenwashing?
FACE WEAKER PRESSURES FOR OWNING & OPERATING POLLUTIVE PLANTS:
1) PRIVATE, NON-ESG RATED FIRMS –>may face less scrutiny, regulatory oversight & public disclosure requirements regarding their env impact compared to publicly listed companies –> more may face fewer external pressures to adopt sustainable practices.
2) HEADQUARTERED IN REPUBLICAN-LEANING DISTRICTS –> env regulations & attitudes towards sustainability initiatives may be less extreme in these areas –> potentially creating more permissive environment for owning & operating pollutive assets.
3) HAVE NOT EXPERIENCED ENV RISK INCIDENTS –> buyers may have a lower awareness & preparedness of or sensitivity to env issues –> buyers may be less inclined to prioritise env considerations in their business operations & decision-making processes –> thus may face less public attention & scrutiny from stakeholders & regulatory bodies for disregarding env considerations.
–> HENCE POLLUTION LEVELS MAY NOT ACTUALLY REDUCE BUT BUYERS OF DIVESTED ASSETS ABLE TO POLLUTE MORE FREELY W /OUT AS MUCH SCRUTINY.
What are the strategic mechanisms facilitating firms to greenwash?
1) SELLERS ADVERTISE THEIR ENV IMPROVEMENTS IN CONFERENCE CALLS W INVESTORS & ANALYSTS POST-DIVESTMENT –> sellers able to strategically portray themselves as environmentally conscious organisations w +ve public image of addressing env concerns & promoting sustainability, despite knowing their limited impact of divestitures on actual pollution levels.
2) BUYERS OF DIVESTED POLLUTIVE ASSETS OFTEN HAVE PRE-EXISTING BUSINESS TIES W SELLERS OR ESTABLISH NEW RELATIONSHIPS FOLLOWING POLLUTIVE PLANT DIVESTMENT –> e.g. prior partnerships, supply chain relationships, or other collaborative arrangements between buyers & sellers –> increased ease of divestment process due to mutual trust, familiarity & shared interests.
