What does academic research reveal about the relationship between climate and sustainability factors and the performance of companies and investments — and how are investors and other stakeholders acting on that evidence?
These questions framed a conversation in London recently between Marcin Kacperczyk, professor of finance at Imperial College London, and Ioannis Ioannou, professor of strategy and entrepreneurship at London Business School, in a session moderated by Linda-Eling Lee, founding director of the MSCI Sustainability Institute.
Below are the top takeaways from the discussion:
Context matters
- Academic researchers — and practitioners — are asking not just whether sustainability pays for companies, but why it might pay, noted Ioannou. “We’re identifying the mechanisms: improved customer loyalty, better employee retention and stronger stakeholder relationships,” he relayed.
- “We need to recognize that this is social science, not physics,” Ioannou stressed. “There are no universal laws. A company is embedded in institutions, norms, legal systems, and cultures, so the results are always contextual.”
- “Data matters enormously, but so does how we interpret it,” agreed Kacperczyk, noting his research with Patrick Bolton finding that investors demand a carbon premium in return for the level and growth in companies’ absolute emissions, not emissions intensity. “If you’re looking for a clean, predictive signal across all firms, stop,” he added. “It doesn’t exist. The market is probabilistic, not deterministic.”
- The challenge, Kacperczyk suggested, turns on finding the mechanism by which investor behavior changes firm behavior. “Finance discounts the future,” he observed. “If we believe that transition risk is rising, even slowly, it will affect valuations today.”
All disclosure is not equal
- “We’ve shown that firms that voluntarily disclose emissions often enjoy lower costs of capital, but only if the market believes the data is credible,” noted Kacperczyk.
- Disclosure has evolved — from a narrow undertaking in which companies report, investors model and regulators review — into something to which politicians and the public also pay attention, Ioannou observed. “That affects how firms behave; what they say, how they say it and to whom,” he suggested. “The task now is to ground disclosure in credible, consistent frameworks that reflect financial materiality—but also navigate political legitimacy.”
- “It’s tempting to treat disclosure as exogenous: The company reports, the market responds, but that’s not right,” agreed Kacperczyk. “Disclosure is a signal. It reflects strategy, governance, risk posture. It’s part of a feedback loop.”
Balancing multiple risks
- Exposure to climate-related physical risk generally does not translate into higher pricing of transition risk, Kacperczyk noted, citing his 2021 study with Patrick Bolton.
- “That said, investors we talk to increasingly feel that physical risks are happening faster than models predicted,” he added, noting that “physical risk could be what catalyzes repricing, especially in jurisdictions where policy hasn’t done so yet.
- “The transition is already happening,” agreed Ioannou. “The real question is whether it will be orderly, or crisis driven.” He noted stress in insurance markets and climate-related impacts on labor. “Markets need to be redesigned to absorb these shocks, not just price them.”
Keep reading
“Navigating climate transition risk with Marcin Kacperczyk,” Theory Meet Practice, MSCI Sustainability Institute, Sept. 12, 2024.
“What drives corporate performance? The role of nation-level institutions,” Ioannis Ioannou and George Serafeim, Journal of International Business Studies, 2023.
“The Impact of Corporate Sustainability on Organizational Processes and Performance,” Robert G. Eccles, Ioannis Ioannou and George Serafeim, Management Science, Volume 60, Issue 11, February 2014.
“Do investors care about carbon risk?,” Patrick Bolton and Marcin Kacperczyk, Journal of Financial Economics, Volume 142, Issue 2, November 2021.