This year's UN Climate Change Conference (COP31) in Antalya, Türkiye, has made implementation its theme: turning climate pledges into action. Much of that action has to happen inside companies, where the flow of new climate pledges has slowed as public commitments have become politically costlier. Who can get companies moving again?
In a recent study, Julian Kölbel (University of St. Gallen) and I show that the investment industry holds a powerful lever: index providers, whose rules decide which companies index funds hold. Can index providers drive corporate climate action by emphasizing their climate rules and actively communicating them to companies? To find out, we ran a field experiment with a major index provider. Its chief executive sent letters restating the provider's climate rules to the board chairs of a randomly drawn group of companies. The companies that received a letter committed to climate targets more often and reported lower emissions.
Our findings at a glance:
- Climate targets: Within two years, 28 percent of the companies that received the letter had committed to or set a target validated by the Science Based Targets initiative (SBTi), compared with 21.6 percent of those that did not. That is a gap of 6.4 percentage points.
- Emissions: By the fourth reporting year, the letter recipients reported about 18 percent lower emissions than the comparison group.
- Firm value: We find no detectable effect on firm value in either direction. The additional climate action does not appear to have come at a measurable cost to shareholders.
Explore the experiment yourself in our interactive visual summary, "Dear Chair".
One letter to 300 board chairs
Our partner offers a family of climate indices that comply with the European Union's (EU) rules for climate benchmarks. These rules allow index providers to give more weight to companies that set and publish emission reduction targets. Our partner went further: companies without a target validated by the SBTi were to be phased out of its climate indices. The SBTi checks whether corporate targets are in line with the Paris Agreement's goal of limiting global warming to 1.5 degrees Celsius.
The rules were public, yet many affected companies had not acted. In February 2022, the provider's chief executive wrote to the board chairs of 300 of them. The letter restated the rule and asked each company to commit to a science-based target by the end of 2022. Chance decided who received a letter. We drew the 300 recipients at random from the 1,227 index firms without such a target, and the other 927 firms form the comparison group. As in a clinical trial, the random draw means that the differences between the two groups are due to the letter, give or take chance. Together, the 1,227 firms accounted for about 39 percent of the market value of all listed companies worldwide.
Three lessons for investors and policymakers
- Index providers can help drive corporate climate action. Our results suggest that engagement by index providers can help drive corporate climate policies and the associated reductions in reported emissions. The letter changed no rule; it put the provider's existing exclusion rules in front of the board.
- Published rules and direct communication work together. The exclusion rules were public for all 1,227 companies, yet those whose chairs received the letter acted more often. A letter costs little to send. If the goal is that companies adapt their policies, it may be worthwhile for index providers to communicate their rules proactively.
- Reported cuts need not be physical cuts. The response we detect is in reported emissions, and part of it seems to run through divestments. The companies' own disclosures suggest that large letter recipients relied more on selling carbon-intensive assets, whose emissions can continue under a new owner. Rules that seek physical decarbonization may therefore need to reward physical abatement rather than lower reported corporate emissions.
From pledges to implementation
COP31 asks how to turn climate pledges into action. Our experiment shows that the investment industry can contribute directly. With clear climate rules that they actively communicate, index providers can move companies to commit to climate targets. We find no measurable cost to shareholders. For a conference devoted to implementation, that is an encouraging message about what the private sector can deliver.
The full paper, "Index Provider Engagement and Climate Action: A Field Experiment", is available on SSRN, and our interactive visual summary takes you through it step by step.
Author:
Florian Heeb is Assistant Professor of Sustainable Finance at the Leibniz Institute for Financial Research SAFE and Goethe University and a Research Affiliate at the MIT Sloan School of Management.
Blog entries represent the authors‘ personal opinion and do not necessarily reflect the views of the Leibniz Institute for Financial Research SAFE or its staff.
