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Investors' consideration of a firm's environmental performance, along with concerns about future impacts on profit, have led many firms to start trying to reduce their carbon footprint. But such environmental pressure—if not calibrated correctly—may backfire.

In a new study, Tepper School researchers have explored how firms' operational strategies differ depending on the environmental metric used to assess environmental impact. The study, "Greenness and its Discontents: Operational Implications of Investor Pressure," is published as a working paper in the SSRN Electronic Journal.

The researchers found that significantly high environmental pressure from the market may result in different operational strategies under different disclosure regimes, with variations in the erosion of the firm value and environmental outcomes.

"Environmental pressure from both equity and debt investors can influence firms' value, which in turn affects stock prices and the cost of debt," explains Alan Scheller-Wolf, Professor of Operations Management at Carnegie Mellon's Tepper School of Business, who worked on the study, along with Sridhar Tayur, Professor of Operations Management at Tepper, and Tepper doctoral student Nilsu Uzunlar.

The positive impact of investor pressure manifests in its ability to foster sustainable business practices, such as investments to mitigate emissions. But there is evidence that under such pressure, firms may respond by selling their carbon-intensive assets to private companies. This reduces transparency and eliminates investor oversight, potentially leading to worse overall societal outcomes that may include increased pollution, higher unit prices, and lower employment.

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