Roy Sorting: Climate and Status Quo Strategies

Abstract

Inspired by Roy (1951), we analyze whether firms competitively sort into transition and status quo technologies, resulting in positive returns (i.e., the best fishers fish, while the best hunters hunt). We apply latent variable techniques on novel data of firm-edits of environmental and workforce fundamentals, focusing on industrial sectors. We find +18-83 basis-point equity price reactions to information that firms competitively sort. However, Roy sorting to transition and status quo opportunities is reduced by 7.7% and 13.6%, respectively, in high net carbon tax geographies, implying value relevance of Roy sorting unless facing net carbon tax rates above 187 euros/ton.

Keywords: Climate Finance, Corporate Climate Strategy, Transition Economy, ESG Scores, Roy Model for Climate Sorting, Signaling Latent Strategies, Business Development in Green versus Brown Growth, Confirmatory Factor Analysis

JEL Classification: G30, G32, M14, Q51, Q54, Q55