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Copenhagen, Glasgow, Paris and beyond: do regulations affect firms’ sustainability strategies?

Environmental Policy
Regulation
Business
Climate Change
Big Data
Adam Chalmers
University of Edinburgh
Adam Chalmers
University of Edinburgh
Robyn Klingler-Vidra
Kings College London

Abstract

The past decades have seen a veritable explosion of public authorities – at the national, regional and international organization level – implementing Corporate Sustainability Policies (CSPs) in an effort to lead firms towards “profit with purpose”. As widespread coverage of COP26 in Glasgow underscored, there is an increasing expectation that public policies are capable of steering business towards sustainability. The logic being that CSPs, whether taking the form of binding legislation or voluntary guidelines, function as blueprints for firms to follow, and specifying practices by which firms must act (e.g., disclosure requirements). Despite increased public CSP activity, and expectation, there is a paucity of systematic research testing whether public policies have, so far, been effective in achieving their aim; studies tend to examine more proximate determinants of firm strategy, on one hand, and the making and diffusion of public policy, on the other. In this paper, we bring together the full transmission chain, from public policy to firm strategy, to offer a novel analysis of when, how and to what extent public CSPs affect firms’ own sustainability communications, reporting activities and business strategies. We do this by using novel methods in natural language processing (NLP) and machine learning (ML) to measure text-reuse: the extent to which text from public CSP documents (e.g., the UN Global Compact) gets copied into firms’ own communications, reports, and sustainability strategy documents. Our analysis draws on a novel database of nearly 1500 CSPs over a 60-year time period from around the globe and a stratified random sample of over 750 firms (the largest cap firms from each of six world regions as well as the world’s most “woke” firms). In addition to identifying which firms adopt which public CSP language the most, we assess when firms tend to copy more CSPs into their own sustainability documents. Our argument is that firms tend to copy more CSP language when they face pronounced and public reputational issues around their own negative environmental, governance and social impacts. We measure these reputational issues using firm-level RepRisk data (which monitors global media sources to flag firms’ ESG risks and violations that have specific reputational, compliance, and financial impacts for the firm) and then test our argument using statistical analyses. Our results show that firms, in no small measure, rush to upgrade their sustainability strategies and communications by coping existing public CSP guidelines when faced with public reputational crises.