Navigating sustainability challenges : three essays on climate change, ESG rating, and geopolitical conflicts

Abstract

The growing focus on sustainability challenges has elevated the need to coordinate solutions and adaptations to address them. A series of recent studies have explored the roles and responsibilities of organizations such as firms and related stakeholders in orchestrating efforts to address these challenges. To add to this stream of literature, I conduct three studies to explore how organizations navigate sustainability challenges. The first essay explores how firms strategically outsource their carbon emissions to suppliers in response to physical climate change exposure. By analyzing a panel dataset comprising 3,763 U.S. firms between 2001 and 2021, we find that a firm’s physical climate change exposure is negatively related to its carbon emissions but positively related to its supplier’s carbon emissions, leading to an insignificant effect on the overall emissions. We use the most damaged hurricanes as quasi-exogenous climate shocks and focus on firms that are headquartered in the neighborhood of the disaster area to address alternative explanations. Further mechanism tests support our logic that physical climate change exposure heightens both managers’ and stakeholders’ climate change awareness, which induces firms to outsource carbon emissions to suppliers. We contribute to the research on climate change and pollution outsourcing. The second essay investigates how ESG investors can take advantage of ESG rating ambiguity to rationalize controversial investment decisions so that these decisions can appear simultaneously congruent with incompatible institutional demands from the financial logic and the social logic inherent in ESG investing. We analyze a panel dataset comprising 7,248 firms across 67 countries between 2006 and 2021, focusing on green stocks and sin stocks that exemplify incompatible institutional demands. We find that ESG rating ambiguity increases ESG ownership in sin stocks, an effect strengthened by the maximum score of the multiple ratings, and decreases ESG ownership in green stocks, an effect strengthened by the minimum score of the multiple ratings. Our findings remain, using a difference-in-differences analysis based on a regulatory shock. These findings contribute to the literature on institutional theory and ESG ratings. The third essay explores how firms increase social skill hiring in response to geopolitical conflicts. As geopolitical conflicts introduce substantial uncertainties into the global supply chains, firms often respond to such conflicts through relocation or reshoring strategies. Extending prior research, we propose an alternative strategy for firms to navigate geopolitical conflicts and stabilize their supplier partnership, i.e., social skill hiring, because employees with strong social skills are crucial in managing and maintaining partnerships amid geopolitical conflicts. Using the U.S.-China trade war as an exogenous shock, our difference-in-differences analysis reveals that U.S. firms exposed to the trade war increase their hiring of employees with social skills. Our mechanism tests show that social skill hiring is greater when firms have a higher number of Chinese suppliers or a more dispersed supply base. Further analysis shows that firms with more social skill hiring experience greater stability with Chinese suppliers in the post-trade-war period. These findings contribute to the research on trade war and social skill hiring.