The Science Based Targets initiative: Its impact on the financial results and the determinants to joing

Abstract: We are currently experiencing a climate crisis. The planet’s temperature is rising considerably due to the emission of greenhouse gases generated by human activities. This situation poses a challenge for everyone, including companies. Private sector actors are taking actions to mitigate the consequences of climate change, such as global warming. Some of these measures are imposed by national regulations, and others are motivated by the firms' own will. The latter include Science Based Target initiative (SBTi), a voluntary initiative that supports companies in setting climate targets to reduce emissions in line with climate science and the Paris Agreement. The number of companies taking action through participation in it is growing. However, SBTis a young initiative that should be further explored, as more research is needed on its effects. This master’s thesis responds to this gap by studying the impact of joining the SBTi on the financial performance of companies measured through stock returns, volatility and financial risk. For this purpose, the Difference-in-Differences (DiD) statistical technique has been applied through a linear regression model to a sample of 4869 companies. It includes both SBTi member and non-members. At the same time, this research also addresses a second objective, to estimate the determinants to join SBTi, since this is a voluntary action, through a Probit model. It has been found that there is a negative relationship when the financial variable is stock return. While when volatility and financial risk are measured, there is no statistically significant effect. These findings show that being a member of SBTi could reduce investor returns, but does not influence the other two financial indicators. This suggests that investors are not attracted to these companies and may indicate that they see the initiative as a costly distraction. Also, as investors manage their portfolios to reduce market downturns, investing in firms that are part of the initiative will not be something they will consider in terms of their votality. Although the initiative's objectives and commitments help to mitigate climate risks by encouraging the reduction of carbon dioxide emissions, they do not generate significant impacts on the level of financial risk, according to the observations. Regarding the results on the likelihood of joining SBTi, it was found that companies that produce lower returns to investors, have lower stock price fluctuations, have higher financial risk and pollute less, are more likely to be members. This suggests that the initiative should drive its efforts towards companies with these characteristics. This study is innovative in its field in that it addresses a topic of current interest but that has been little explored, the SBTi. It applies two methodologies, regression analysis through DiD and Probit model, but with global panel data, which makes it more challenging. This master’s thesis contributes to the research community in three ways. First, it fills a gap providing new insights into SBTi from a financial perspective. Second, it informs the initiative itself of the implications of its activity and makes it easier to identify potential members and attract them. Third, it can be useful for investors who want to be part of the fight against climate change and include these companies in their portfolios, but want to know the financial consequences of doing so.