We show that U.S. firms cut imports by 11.1% and are 4.2% more likely to terminate a trade relationship when their international suppliers are hit by environmental and social (E&S) scandals. These trade cuts are larger for publicly-listed U.S. importers facing high E&S investor pressure and lead to cross-country supplier reallocation, suggesting that E&S preferences in capital markets can have real effects in far-flung economies. Larger trade cuts around the scandal result in higher supplier E&S scores in subsequent years, and in the eventual resumption of trade. Our results highlight the role of customers’ exit in ensuring suppliers’ E&S compliance along global supply chains.

We study how institutional investors that join climate-related investor initiatives are actively decarbonizing their equity portfolios. Decarbonization could be achieved by re-weighting portfolios towards lower carbon emitting firms or alternatively via targeted engagements with portfolio companies to reduce their emissions. Our analysis suggests that portfolio re-weighting is the predominant strategy to green their portfolios, in particular by investors based in countries with carbon emissions pricing schemes. We do not uncover much evidence of engagement even after the 2015 Paris Agreement. Furthermore, we find no evidence that climate-conscious investors allocate capital towards firms developing climate patents, but they do re-weight towards firms starting to generate green revenues. Overall, our analysis raises doubts about the effectiveness of investor-led initiatives in reducing corporate emissions and helping an all-economy transition to “green the planet”.

This paper studies the systematic effect of environmental regulations on firms by constructing a time-varying and industry-specific measure of EPA regulatory restrictions over 1974-2021. Identifying industries in years that experience significant changes in regulation restrictions, we find that stricter EPA regulations are associated with an improvement in firm value. Investigating the potential underlying mechanism, we find that the positive valuation effect is more pronounced for firms with myopic managers or weak shareholder monitoring, where agency frictions hinder value-enhancing investments. We further find that stricter EPA regulations induce green innovations and increase the marginal performance of R&D in regulated firms, reflecting an increase in innovation incentives. Collectively, our findings suggest an unintended benefit of stricter environmental regulations: serving as an external governance mechanism by holding managers accountable for their decisions, and in turn, reducing agency frictions to induce value-enhancing investments.