Management Accounting Section Midyear Meeting

Science-Based Carbon Emissions Targets

• In Event: Budgeting and Target Setting III

Abstract

We examine the effect of adopting a standard for setting science-based carbon emissions targets to limit global warming below 2 degrees Celsius on firms’ target difficulty and investments to achieve those targets. We find that firms with a track record of ambitious and successful target completion, firms perceiving climate change-related risks and firms developing low-carbon products and services are more likely to set science-based targets. Using a differences-in-differences research design that compares the science and non-science targets of a firm, we find that targets become more difficult when firms adopt the science-based standard for the target, consistent with the standard increasing target difficulty and inconsistent with firms relabeling their existing targets. The increase in difficulty is accompanied by increased investment in emission-reduction projects and higher expected emission savings and payback periods from these projects, consistent with firms changing real behaviors and investment to achieve more difficult targets. Given that the science-based standard is determined externally of the adopting organization, our results suggest that external standards for target setting could have both target and investment effects.

Authors

• David Freiberg, Harvard Business School

• Dennis Campbell, Harvard Business School

• Jody Grewal, University of Toronto

• George Serafeim, Harvard University Business School