The climate crisis poses unprecedented threats to global society and demands immediate, increased action for successful mitigation (IPCC, 2022). If global temperatures are to be limited to 1.5°C above pre-industrial levels – as targeted in the Paris Agreement – carbon dioxide (hereafter ‘carbon’) emissions must fall by 45% by 2030 and reach net zero by 2050.[1] Though traditionally perceived as an issue that governments should take responsibility for, regulators have more recently opted to leverage global investment funds and private sector innovation to finance the low-carbon transition. As such, the role of corporations and their investors in providing solutions has been increasingly discussed (Serafeim, 2018).
Climate change presents significant risks to companies and their investors that can materially impact business performance.[2] In addition to energy costs and exposure to climate change litigation, these include exposure to the physical effects of climate change, regulatory risk, product risk, and risk to reputation.[3] There is a growing demand for carbon-related information from regulators, investors, and other market actors, which can be explained by the significance of controlling emissions in stabilising climate change.[4] Particularly in the absence of mandatory carbon reporting, the literature finds that voluntary disclosure can legitimise business activities, improve reputation, lower the cost of capital, and reduce future emission levels.[5]
The purpose of this dissertation is to examine the potential causal effect of venture capital (VC) ownership on the disclosure of carbon emissions. As investors in early stage entrepreneurial firms, venture capitalists (VCs) have funded several of today’s largest, most influential companies, such as Facebook (Meta Platforms) and Google (Alphabet). Many of these companies become multinational corporations (MNCs) operating in multiple countries. The international supply chains of these MNCs have been found to account for approximately 20% of global emissions.[6] Critically, these companies also frequently define industry norms regarding business practice and investor management.[7] Thus, they are critical to any potential climate progress. However, their carbon disclosure records vary significantly. More regulation requiring mandatory disclosure is being introduced, but many companies do not yet disclose sufficient levels of emissions information to develop credible decarbonisation plans that are consistent with the Paris Agreement.
Companies that receive VC backing are typically private and in their early stages of development. Thus, they are rarely legally obliged to disclose emissions information. This causes a lack of publicly available firm-level data, meaning that extant empirical literature is limited in determining whether various VC characteristics impact their portfolio companies’ carbon disclosure. Traditional economic theory would imply that as profit maximising agents, VCs will consider carbon disclosure an unnecessary cost to their portfolio companies and will therefore discourage corporate managers from pursuing such practices.[8] However, the rise of VCs with so-called sustainable investment orientations, which consider the objective of sustainable development alongside profit maximisation[9], suggests the possibility of heterogeneous attitudes among these investors. As such, the primary research motivation for this dissertation is to understand the potential influence of VC financing so that emerging start-ups may be systemically aligned with a low-carbon, sustainable future. As will be discussed in Section 2, due to organisational imprinting, attempting to instil appropriate disclosure practices in mature, likely public, companies is insufficient for climate action and sustainable development.[10]
The dissertation examines a global panel of companies from 2000-2018 to test any potential effects on carbon disclosure, defined as whether a company reports its carbon emissions in a given year. Categories of carbon disclosure will be defined further in Section 2.1. The independent variables are VC ownership and VC investment orientation, defined as whether a company has received backing from a VC investor, and whether this investor has a specific strategy. The dissertation aims to empirically contribute to the literature by constructing a novel dataset from several financial databases to resolve the data availability issue; private funding data is first collected then matched with financial and emissions information on publicly listed corporations to determine which of these companies have received VC investment. The dataset includes multiple controls motivated by findings from the literature to mitigate any endogeneity concerns, such as omitted variable bias. The dissertation draws on subsampling techniques (which are under-represented in the literature) and multiple types of carbon disclosure (the dependent variable) and VC ownership type (the independent variable) to understand the finer dynamics of any potential causal relationship.
Existing studies have analysed the effect of larger, institutional investors on carbon disclosure and the effect of VC backing on corporate social responsibility (CSR) performance.[11] However, to the best of my knowledge, no papers have yet isolated the effect of VC investment on carbon disclosure. This is therefore the primary theory-based contribution of this dissertation. Related empirical studies tend to focus on a single country in their analysis.[12] By adopting a global outlook, the dissertation aims to contribute to the literature by identifying the potential effect of institutional differences, and whether these impact the attitudes of VCs. Similarly, papers are often limited in their variety of econometric methods. This dissertation employs several linear and nonlinear models to determine how the VC ownership-carbon disclosure relationship can be best estimated, and to maximise the robustness of findings. It also aims to extend cross-disciplinary research by considering whether women- and minority-owned VCs have a moderating effect on carbon disclosure among their portfolio companies. Several papers have considered more diverse representation on company boards, and its subsequent effect on carbon disclosure.[13] However, equivalent evidence for the diversity of VC ownership is rare.
Conclusion
This dissertation has empirically examined the relationship between VC ownership and carbon disclosure. To try and best establish a robust, causal relationship, a variety of linear and nonlinear models are employed to determine how the relationship can be most appropriately estimated. Several databases are used to construct a novel dataset and provide a solution to the lack of available private company and funding information, which has so far severely limited the extant literature. In addition, a variety of company- and VC-specific factors are controlled for to mitigate potential omitted variable bias. A global panel of companies across an extended time period is analysed with the aim of extending the literature, particularly by considering whether institutional effects can drive heterogeneous VC investor attitudes.
Econometric analysis reveals several notable findings. As expected, the general effect of VC ownership is found to negatively impact the likelihood of carbon disclosure, particularly on Scopes 1 and 2, though this seems restricted to the linear model estimation. The MLE used in the probit and logit models is unable to find any statistically significant relationships. To examine this relationship further, VC ownership is replaced by three different VC investment orientation dummy variables. Here, it appears that the negative effect of broader VC ownership is largely being driven by conventionally oriented VCs, though there is some evidence of a positive effect exhibited by impact-oriented VCs. When a subsample of companies exclusively with VC backing is analysed, further support for the positive effect of VCs with an impact investment orientation is found across all scopes. These results are consistent under probit and logit models, which also find a positive effect of ESG-oriented VCs on Scope 3 disclosure.
Subsampling by early-stage rounds of funding reveals stronger effects by VCs of conventional and impact investment orientations, which further supports organisational imprinting theory and the literature review’s expectations. Cox survival analysis finds a statistically insignificant effect of broader VC ownership. Despite this, the investment orientation models find further evidence that impact oriented VCs positively impact the likelihood of disclosure over time across all scopes whilst ESG-oriented VCs again exhibit a positive relationship with Scope 3 disclosure. When the sample is decomposed into US-based VCs and those from the rest of the world, findings indicate that US-based VCs of all investment orientations have a largely negative effect on carbon disclosure, whereas non-US-based VCs exhibit a generally positive effect. This is unexpected based on findings from extant literature. US-based VCs have statistically significant heterogenous attitudes towards Scope 3 disclosure, though non-US-based VCs do not seem to regard this as a strategic priority. Finally, some evidence is found to support the notion that minority-owned VCs have a positive moderating effect on disclosure under linear model estimations. However, this finding cannot be replicated using the probit and logit models.
The findings presented by this dissertation offer several implications for VCs, their portfolio companies, and associated carbon disclosure regulation. Analysis finds notable evidence in support of organisational imprinting, and the significantly influential effects that VCs can have on their portfolio companies. This is further supported when subsampling by early-stage VC investment. VCs should therefore act accordingly with the knowledge that the business practices they instil within portfolio companies will likely persist even after they exit these investments. This could however raise conflicting interests between the short-term investment horizons of VCs and a company’s longer-term outlook and plans for sustainable growth. These might be better reflected by the interests of larger, institutional investors, for example, who tend to exhibit longer investment horizons.
Similarly, corporate managers should be aware of the strong influence of VC investors when seeking funding in the early stages of their development. In particular, the heterogeneous effects of VCs with different investment orientations on carbon disclosure should be considered if a company wishes to align its values with appropriate investors, such as those who prioritise sustainable practices. More broadly, the literature review finds multiple empirical benefits of carbon reporting. As such, this dissertation argues that such practices should be encouraged from the outset of a company’s development. This is particularly important given the increasing importance of carbon emissions to idiosyncratic risk, and broader financial market and regulatory trends that are shifting to encourage a global low-carbon transition.
Several implications are also noted relating to carbon disclosure regulation and VC investment. Analysis demonstrates that the marginal influence of investors on Scope 3 emissions disclosure is greater than that on Scopes 1 and 2. This is to be expected given mandatory reporting of Scope 1 and 2 emissions among some companies in the sample, and the largely voluntary nature of Scope 3 reporting. However, this dissertation argues that regulators should aim to implement mandatory Scope 3 reporting as soon as possible. In doing so, companies and their broader stakeholders can gain a better awareness of the emissions caused by their supply chain. Thus, companies can take action in reducing such emissions, and their stakeholders can be better informed to pressure them into doing so.
Subsampling by the location of VC investor reveals that US-based VCs have a largely negative effect on the likelihood of disclosure. Given the dominant position of US VC funding globally, US regulators should consider the feasibility of policies that encourage their VCs to guide their portfolio companies in a manner which is more consistent with national decarbonisation targets. This is particularly important due to the US’ status as a global superpower, and its ability to lead by example in mitigating climate change. More broadly, the distinct lack of carbon disclosure that is present in the analysed sample should motivate further regulatory reform to encourage greater reporting on a global scale.
VC investors have an incredibly significant role in funding and influencing many of the world’s largest and most powerful companies. These companies are responsible for a considerable share of global emissions and have the ability to lead by example in their respective sectors. Climate change poses an unprecedented threat to society at large. In better understanding the effect of VC ownership on key indicators such as carbon emissions, public and private actors can more effectively press for the design and promotion of sustainably aligned companies that can help to facilitate a global low-carbon transition.
References
[1] United Nations (2022).
[2] Harmes, A. (2011). The limits of carbon disclosure: theorizing the business case for investor environmentalism. Global Environmental Politics, 11 (2), pp.98–119.
[3] CDP (2006). Carbon Disclosure Report 2006: Canada 280. Toronto, ON: CDP Canada.
[4] Luo, L., Lan, Y.-C. and Tang, Q. (2012). Corporate incentives to disclose carbon information: evidence from the CDP Global 500 Report. Journal of International Financial Management & Accounting, 23 (2), pp.93–120.
[5] He, Y., Tang, Q. and Wang, K. (2013). Carbon disclosure, carbon performance, and cost of capital. China Journal of Accounting Studies, 1 (3–4), pp.190–220. Cui, J., Jo, H. and Na, H., 2018. Does corporate social responsibility affect information asymmetry? Journal of Business Ethics, 148 (3), pp.549–572. Alsaifi, K. (2021). Carbon disclosure and carbon performance: Evidence from the UK’s listed companies. Management Science Letters, pp.117–128.
[6] Zhang, Y.-J. and Liu, J.-Y. (2020). Overview of research on carbon information disclosure. Frontiers of Engineering Management, 7 (1), pp.47–62.
[7] Alakent, E., Goktan, M. S. and Khoury, T. A. (2020). Is venture capital socially responsible? Exploring the imprinting effect of VC funding on CSR practices. Journal of Business Venturing, 35 (3), 106005.
[8] Griffin, P. A., Lont, D. H., and Sun, E. Y. (2017). The relevance to investors of greenhouse gas emission disclosures. Contemporary Accounting Research, 34 (2), 1265–1297.
[9] Lin, L., (2022). Venture capital in the rise of sustainable investment. European Business Organization Law Review, 23 (1), pp.187–216.
[10] Croce, A., MartÃ, J. and Murtinu, S. (2013). The impact of venture capital on the productivity growth of European entrepreneurial firms: ‘Screening’ or ‘value added’ effect? Journal of Business Venturing, 28 (4), pp.489–510.
[11] Jaggi, B., Allini, A., Macchioni, R. and Zagaria, C. (2018). The factors motivating voluntary disclosure of carbon information: Evidence based on Italian listed companies. Organization & Environment, 31 (2), pp.178–202.
Velte, P. (2020). Institutional ownership, environmental, social, and governance performance and disclosure – a review on empirical quantitative research. Problems and Perspectives in Management, 18 (3), pp.282–305.
Li, J.-J., Xu, C., Fung, H.-G. and Chan, K. C. (2021). Do venture capital firms promote corporate social responsibility? International Review of Economics & Finance, 71, pp.718–732.
[12] Alakent et al (2020). Cheng, C., Chu, Y., Deng, Z. and Huang, B. (2022). Venture capital and corporate social responsibility. Journal of Corporate Finance, 75, 102208.
[13] Hollindale, J., Kent, P., Routledge, J. and Chapple, L. (2019). Women on boards and greenhouse gas emission disclosures. Accounting & Finance, 59 (1), pp.277–308.
Al-Qahtani, M. and Elgharbawy, A. (2020). The effect of board diversity on disclosure and management of greenhouse gas information: evidence from the United Kingdom. Journal of Enterprise Information Management, 33 (6), pp.1557–1579. Zhang and Liu (2020).
08 November 2022