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The environmental record of companies in times of crisis

Pierre Guérin, Fabio Natalucci and Felix Suntheim

October 26, 2020

Leaders are generally expected to “rise to the occasion” in times of crisis. As businesses and their leaders do the best they can in the face of the current health and economic crisis, another crisis is looming on the horizon. An impending environmental crisis, overshadowed by the urgency of the pandemic, requires companies, and other stakeholders, to take action. What actions will their leaders take?

In our last analysis, we examine previous episodes of financial and economic crisis in order to assess the likely repercussions of the current crisis on the environmental performance of companies.

On the one hand, the COVID-19 pandemic could increase awareness of environmental risks and change consumer preferences, business activities and investor behavior, which could accelerate the transition to a low-carbon economy. On the other hand, it is possible that financially weakened companies and in the grip of increased economic uncertainty reduce their investments in long-term, capital-intensive green projects, which would slow this transition.

Lessons from the past

By examining a large international sample of publicly traded companies over the period 2002-2019, our analysis reveals that the environmental performance of financially troubled companies is significantly lower than that of more successful companies.

In our analysis, we took into consideration a variety of factors that generally serve as proxy variables for financial hardship: Small unlisted companies are more likely to experience financial stress than large listed companies. Likewise, companies subject to these constraints may be less willing to pay dividends.

Thus, for companies that do not pay dividends, are not listed or are smaller, the score on the environmental balance sheet is, on average, 10 to 30% lower than that of large companies that pay dividends or are listed. in stock exchange.

A shock with strong macroeconomic and financial repercussions, such as that of the crisis linked to the COVID-19 pandemic, increases uncertainty and disrupts economic activity. As a rule, it thus amplifies the financial difficulties of companies and risks dissuading them from making green investments.

As our chart of the week shows, a sudden rise in global financial tensions and uncertainties, comparable to the average level in the first half of 2020, would cause companies’ environmental balance sheets to deteriorate, undermining the progress made over the years. of the last decade. It is essential to note that the environmental balances do not return to the level which was theirs before the shock, even three years later. Likewise, our analysis shows that when economic output declines, companies’ environmental performance also declines.

Observations for the present

These findings have far-reaching consequences in the context of the COVID-19 crisis and the urgent need to reduce global greenhouse gas emissions.

First, in the absence of climate policy measures, such as the push for green investments advocated in the recent edition of World Economic Outlook, tighter financial constraints and unfavorable economic conditions can harm companies’ environmental records, reduce green investments and potentially slow down the transition to a low-carbon economy. Therefore, to compensate for any possible deterioration in business performance in this regard, it will be essential to put in place climate policies that alleviate business financial constraints and promote green investments.

Second, in addition to ecological stimulus plans, it will be essential to take measures to promote sustainable financing:

the communication of comparable and consistent data on the viability of the activities carried out would make it possible to better assess the environmental performance of companies. Only accurate and properly standardized data and information will enable investors to determine the extent to which companies are exposed to the financial risks associated with climate change;
It is important to give investors confidence that the concept of sustainability is not only an attractive name, but that it underpins sustainable investment decisions. Achieving this requires continuing to standardize and define more clearly what constitutes viable funds;
It will be essential to ensure international cooperation and to implement global initiatives in a spirit of collaboration in order to benefit from the efforts made and avoid fragmentation of the markets for durable assets. The IMF will contribute to this process.


Pierre Guérin is an economist in the Global Financial Stability Analysis Division in the Monetary and Capital Markets Department of the IMF. He previously worked in the Economics Department of the OECD and in the International Economic Analysis Department of the Bank of Canada. His research interests include macroeconometrics, international finance and energy economics. Mr. Guérin holds a doctorate in economics from the European University Institute.

Fabio M. Natalucci is one of the deputy directors of the Monetary and Capital Markets Department. He is responsible for the Global Financial Stability Report, which presents the IMF’s assessment of risks to the stability of the global financial system. Prior to joining the IMF, Mr. Natalucci served as Senior Associate Director in the Monetary Affairs Division of the Board of Governors of the United States Federal Reserve System. From October 2016 to June 2017, he served as Assistant Secretary for International Financial Stability and Regulation in the United States Department of the Treasury. He received his doctorate in economics from New York University.

Felix Suntheim is a Senior Financial Sector Expert in the Global Financial Stability Analysis Division in the Monetary and Capital Markets Department of the IMF. He previously worked in the economic branch of the Financial Conduct Authority of the United Kingdom. His research work focuses on the empirical study of corporate finance and financial intermediation. Mr. Suntheim holds a PhD in Finance from Bocconi University (Italy) and a Diploma in Economics from the University of Bonn (Germany).

EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.

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