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2023 ZIBS Forum, on the theme of "Innovating for the Future: The Frontier in Business Excellence", was successfully held on January 13. The forum focused on topics such as data intelligence, environmental science, financial technology, digital innovation, and corporate restructuring. It shared the latest research findings, innovative discoveries, and practical experiences related to cutting-edge business developments, providing insightful perspectives and strategies for the sustainable development of the global business, technology, and education sectors.
In the Young Scholars Forum, Assistant Professor BAO Yangming from the International School of Economics and Management at Capital University of Economics and Business systematically evaluated the value of green innovation using global evidence and examples. Her evaluation elucidated the significant positive impact of green innovation on both businesses and society. The following is a summary of her speech.
With rising public concerns over global environmental and climate issues, investors consider firms' environmental and climate risks. For those risks, we can generally classify them into two categories. One is called physical climate risks: direct impairment, e.g., rise of sea level or hurricane, while the other is called transition risks, which have cash flow risks arising from a transition to a low-carbon economy due to stringent environmental-related policies, so those firms that have more pollution would be subject to higher regulation or litigation risks. Moreover, changing preference of stakeholders, including consumers, labor, and investors, means they would like to buy products with green labels or are more likely to choose to work in green firms, so that would all affect firms value. Recent research shows that not only equity holders, but creditors also start to take risks that would affect firms' cost of debt.
Recent research shows that not only equity holders, but creditors also start to take risks that would affect firms' cost of debt. In response, firms also devote themselves more to ESG, which is in short for environmental and social responsible commitments and practices. However, whether such a commitment is credible is still a controversial topic. We are not sure whether these firms are really doing something or just using it as a strategy, which is known as greenwashing or window-dressing behavior. So this is also a very big issue in ESG-related work because how can we measure firms greenness?
In this work, we choose to focus on a group of firms that develop newer, cleaner, and renewable technologies that return as green technologies to cope with environmental pressure. This is a long-term commitment because firms really need to put something, including R&D expenses, and a lot of more resources into developing such techniques. And this is all supported by previous work that these firms did to reduce pollution emissions afterwards. Moreover, they are important because they have the potential to affect the entire tragedy of corporate innovation. However, a recent work points out that currently ESG funds or ESG scores do not really reward for this green patenting activity because normally these are those firms in traditional sectors like energy that urgently need to develop clean technologies. So there is actually a tradeoff between short-term and long-term transition risk in valuing these firms.
RQ1: The research question is how do creditors value firms that produce green technology?
Our second motivation comes from the fact that environmental challenges are global issues. However, different countries have different standards for environmental policies. So, stringent environmental regulations can promote innovation, leading to improved international competitiveness, which is known as Porter's hypothesis. However, in the meantime, investors might also exploit the differences in countries EPS to invest strategically. For example, they might enter countries with lower EPS to invest in firms with higher short-term risk, which is known as regulatory arbitrage behavior.
RQ2: How countries' differences in EPS would affect green innovative firms financing is also an important question because it would affect the transfer of green technology development across countries.
So in this research, we study banks valuations of green innovation in international loan markets. Specifically, we try to figure out whether banks offer lower loan rates for firms that produce green technologies and why.
Moreover, by utilizing the cross-country lending relationships, we can further explore whether the differences in the lending and borrowing countries's EPS would affect bank lending decisions.
We think that examining why and where banks prefer to lend to green innovative firms is critical to understanding the cost and capital allocation for green innovation.
First, as firms equipped with green technologies, they have lower transition risk compared to peer firms because they can avoid penalties for poor compliance with regulations. For example, when a carbon tax is introduced, those peers might not find it profitable to operate anymore, while those green firms might take the chance to assist the market. Moreover, it could also improve their legitimacy as consumers or stakeholders; they find that these firms have more promise in the future, which increases their firm value. However, as mentioned earlier, those firms that develop these green technologies are not randomly selected. Maybe these are those firms under green pressure; they need to do such things in order to not get rid of this higher regulation. Moreover, like other R&D processes, it's costly with uncertain financial returns, so it's highly skilled. Therefore, it is an important question as to how banks would value this green innovation and whether they would offer any beneficial loan contracts to these green innovative firms.
H1: Banks value green innovation and offer beneficial loan contracts to green innovation firms.
Second, we think that transition risk should play a role when banks value these green innovative firms. So if that is the case, we should expect that effect to be stronger in areas where there is more stringent environmental regulation or in societies with stronger preferences towards low-carbon economies.
H2: Banks value green innovation when transition risk is more relevant.
Third, we try to examine banks cross-border learning strategies. On the one hand, they may choose to lend to innovative firms in lower-EPS countries compared with their home countries. Because they can diversify their local exposure to high regulation and also because, as I mentioned earlier, these green enough teams firms could be riskier in the short term, investing in areas with lower EPS would be safer for banks.
Moreover, on the other hand, banks might choose to lend these green firms in higher EPS because there are simply more local stakeholders who value green, which could enhance firm value. Also, stringent regulation can spur green innovation and, via this knowledge spillover, improve technological value and make firms greener.
H3: Net effects is also inclusive.
That's why we perform this empirical study to compare syndicated loans obtained for global firms and classify them into firms with green and non-green patents. Of course, there are indulgent selection issues because banks and firms are not randomly matched. They simply choose each other under some unobserved factor. So to deal with that factor, we exploit a quasi-experimental shock, which is to introduce the launch of the European Union Emission Trading System in 2005, which is also the leading trading market for carbon currently in the world. And previous studies show that this EU-ETS spurred the development of new carbon technologies for the regulated firms, so we compare the regulated and nonregulated before and after the events to design this difference-in-differences strategy and identify the effects.
We find that banks do value firms that produce more green patents and offer them lower long-term rates, and we find evidence supporting the transition risk channel.
Moreover, we find that banks would offer lower loan rates and more credit to green innovative firms located in lower EPS countries. Our study has this policy implication as the different standards of EPS across the world can affect bank lending behavior due to banks's arbitrage regulatory motives, which can consequently affect the cost and allocation of credit for green technology development.
*This article is based on the speech made by BAO Yangming at ZIBS 2023 Forum. The views and opinions expressed in this article are those of the speaker and do not necessarily reflect the views or positions of ZIBS.
BAO Yangming
Assistant Professor
Yangming Bao Ph.D., Assistant Professor in CUEB-ISEM. She received her bachelor's degree from Xiamen University in 2013, and her master's degree and Ph.D. in finance from Goethe University Frankfurt in 2016 and 2019, respectively. Her research interests include corporate finance and credit markets, with a recent focus on green innovation financing, cross-border mergers and acquisitions, and corporate governance. Her research was published in the Journal of Corporate Finance.
