Greening up their act: Corporate carbon emissions reduction in response to political risk

Abstract

This study explores whether firms decrease their carbon emissions in response to heightened political risk. Political risk often imposes significant economic consequences, prompting companies to engage in costly strategies such as political lobbying. Alternatively, firms may opt to manage their emissions to partially mitigate political risk. We posit that high carbon emissions can attract unwanted political scrutiny, making emissions reduction a strategic response to escalating political risk. Our findings demonstrate that firms indeed lower their emissions in response to political risk. Moreover, we find that specific firm characteristics can affect the relationship between political risk and carbon emissions. Finally, we show that firms achieve emissions reductions through investments in environmental innovation. To investigate robustness, we employ multiple identification strategies, including entropy balancing, instrumental variable analysis, and quasi-natural experiments. Our findings highlight the strategic importance of emissions reduction as a response to political risk, offering insights for policymakers, investors, and corporate decision-makers on aligning sustainability efforts with risk management strategies.