Female representation on boards and carbon emissions: International evidence

Highlights

• This paper examines the effect of female representation in the boardroom on corporate carbon emissions using a large sample of firms from 40 countries.

• Results show that board gender diversity fosters corporate sustainability through the reduction of greenhouse gas emissions.

• Findings are robust to the use of alternative definitions of board gender diversity, multiple estimation methods, inclusion of additional control variables, and potential endogeneity concerns.

Abstract

This paper examines the effect of board gender diversity on firms’ carbon emissions. Using a sample of firms from 43 countries during the 2005–2019 period, we establish that firms with more gender-diverse boards have a lower carbon footprint. Our results are shown to be robust for a battery of sensitivity checks, including the use of alternative definitions of board gender diversity, multiple estimation methods, inclusion of additional control variables, and potential endogeneity concerns.

Introduction

Over 200 years of industrial activity has caused a fundamental change to our climate system, representing the grandest of challenges facing humanity (Wright and Nyberg, 2017). Businesses, governments, and societies are having to adapt their operating practices to encourage a more sustainable planet.

The introduction of the United Nation's 2030 Sustainable Development Goals, paired with the 2015 Paris Agreement, as well as most recently the 2021 United Nations Climate Change Conference (COP26) hosted in Glasgow – emphasize the extent to which world leaders have found a consensus on this issue (Zhang et al., 2019). Equally, organizations are critical in society's ability to mitigate and adapt to climate change (Howard-Grenville et al., 2014).

Greenhouse gas (GHG) emissions represent the biggest market failure the world has ever seen (Stern, 2008). There is a growing body of compelling literature demonstrating the need to rapidly reduce the world's greenhouse gas emissions (Leggett et al., 2019; Haites, 2018; Hertwich and Wood, 2018). Quadrelli and Peterson (2007) conclude the trend in growing gas emissions is discordant with alleviating atmospheric concentrations of GHG and eluding lasting climate change. However, the actions taken by most senior decision makers across business and government have only compounded this issue (Rickards et al., 2014).

On January 1st, 2020, the European Unions’ Emission Trading System (EU ETS) agreement entered into force and became operational. During its inception, two phases of the scheme running from 2005 to 2012, ensured European firms were granted carbon emission allowances free of charge (Oestreich and Tsiakas, 2015). The trading of excess allowances in the open market, led to the emergence of the largest multinational carbon market in the world. Debates regarding the necessity of a global carbon tax, between both academics and policy makers, have preceded the launch of the EU ETS (Hoel, 1996).

With the world becoming more carbon-constrained, investors are fundamentally evolving their methods of identifying and prioritizing firms that consider “carbon exposure” as a competitive advantage, as opposed to solely being an environmental compliance issue (Schultz and Williamson, 2005). For instance, global industry leaders have been challenged to focus on incremental actions to ultimately curb greenhouse emissions. The “Big Three” investors – BlackRock, Vanguard, and State Street Global Advisors – are being implored to require their portfolio companies to improve their carbon emission performance (Azar et al., 2021). In January 2021, BlackRock committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner, announcing the key steps required to enable their clients to navigate the transition (Fortune, 2021) .¹ The month prior, Vanguard set targets to cut their emissions by 2030, and ultimately committed to also achieving net zero by 2050 (Financial Times, 2021).² State Street Global Advisors followed suit by committing to similar goals, whilst also launching three new “SPDR” exchange-traded funds (ETFs) designed to help investors to incorporate environmental, social, and governance (ESG) characteristics into their portfolios (Bloomberg, 2022).³

Global sustainable fund assets surpassed $2.75 trillion at the end of the first quarter of 2022, consequently the U.S. securities regulator is proposing an ESG fund disclosure rule change to crack down on “greenwashing” (Financial Times, 2022).⁴ In May 2022, the U.S. Securities and Exchange Commission (SEC) fined BNY Mellon Investment Adviser Inc. $1.5million for misrepresenting their fund's environmental and social criteria, representing a landmark as the SEC's first fine related to funds’ ESG descriptions (The Wall Street Journal, 2022).⁵

The practice of ESG investing can be traced back to the early 1960s, initially driven by the investment risks posed by climate change (Townsend, 2020). ESG-oriented responsible investing has become more popular amongst the fixed-income and liquidity-management fields in recent years, driven predominantly by access to better standards of data (Pan, 2020). Subsequently in recent years, ESG ratings have supposedly enabled stronger performance of traded stocks. Khan (2019) developed new corporate governance and ESG metrics that can capitalize on ESG signals for potential investment value. On the other hand, despite the social benefits attributed to ESG investing, Cornell (2021) suggests both investor preferences and investor risk are two primary factors which ultimately hinders any substantial expected returns. Another key component driving the performance of any fund is risk mitigation (Bender et al., 2019). Sustainable investing plays a critical role in alleviating “total, systematic, and idiosyncratic risk of equity funds” (Maxfield and Wang 2021).

There is a growing body of research correlating more diverse approaches to governance, as having a positive impact on a firm's financial and green performance (e.g., Fernández-Temprano and Tejerina-Gaite, 2020; Hassan and Marimuthu (2018); Jitmaneeroj, 2018; Cooper, 2017; Miller and del Carmen Triana, 2009). For instance, Hunt et al. (2015) documented a statistically significant relationship between the diversity of a firm's leadership team and its overall financial performance. Within this McKinsey&Company study, firms were 15 percent more likely to beat the national industry median for financial returns if they fell within the top quartile of gender diversity.

Furthermore, the behaviors and characteristics of board of directors have become a good indicator for the corporate social responsibility of a business. For instance, Atif et al. (2021) find a positive relationship between board gender diversity and renewable energy consumption, indicating boards require two or more women to have a significant impact. Hasan et al. (2018) examines the impact of board gender diversity on corporate violation of environmental policies. The authors documented that greater female representation ultimately reduced the frequency of such violations. Moreover, they show that higher corporate diversity enhances a firm's environmental policy, leading to lower litigation risk.

The tangible impact of demographic diversity on firm performance, informs the growing belief that increasing board gender diversity will have positive impact on a firm's performance – regardless of whether economic, environmental, or operational. In light of the previous discussion, we hypothesize that having more female board directors will have a negative impact on the carbon emission offset at a firm, ultimately strengthening their firm's environmental sustainability.

Using a sample of 10,844 firms operating in 40 countries around the world over the period 2005–2019, we find support for the view that board gender diversity fosters corporate sustainability through the reduction of greenhouse gas emissions. We test the reliability of our findings by undertaking a wide range of robustness checks including the use of alternative definitions of board gender diversity, multiple estimation methods, inclusion of additional control variables, and potential endogeneity concerns.

The remainder of the paper is structured as follows: Section 2 presents the sample, whilst defining the variables; Section 3 illustrates and reports the empirical analysis; the penultimate section contains our robustness checks; with Section 5 concluding the paper with our key findings and policy implications.