Episode 049: Giri Kanagaretnam
Beliefs about climate change vary, and one big difference of opinion is whether we should try to do anything about it. One way of getting people to do something about climate change is through tax incentives. But what makes one company take advantage of tax breaks for green technology, while another company does nothing? Do the company’s beliefs about climate change matter? And how would you know what a company believes, anyway? These are the kinds of questions Giri Kanagaretnam can answer. Giri is a Professor of Accounting at the Schulich School of Business, where he holds the Ron Binns Chair in Financial Reporting, Banking and Governance.
Transcript
Cameron: I think its fair to say that beliefs about climate change vary. It’s not just about whether climate change is real. We’ve all seen the forest fires, the flooding, and the warmer winters. The big difference of opinion seems to be whether we should try to do anything about it.
One way of getting people to do something about climate change is through tax incentives. The prospect of a tax credit for buying an electric vehicle might nudge you into getting one, particularly if you believe people are responsible for climate change.
What about corporations, though? What makes one company take advantage of tax breaks for green technology, while another company does nothing? Do the company’s beliefs about climate change matter? And how would you know what a company believes, anyway?
These are the kinds of questions Giri Kanagaretnam can answer. Giri is a Professor of Accounting at the Schulich School of Business, where he holds the Ron Binns Chair in Financial Reporting, Banking and Governance.
Giri, welcome to the podcast.
Giri: Thank you, Cam. Nice to be here.
Cameron: It's great to have you here. You are one of my closest colleagues at the school because you're part of the accounting area with me, so it's a great pleasure to be able to talk to someone who works closely with me, for a change. You have a whole bunch of different roles at the school. Can you give people just a rough idea of the various hats that you are wearing at Schulich?
Giri: I mean, primarily, I think I'm a researcher, so I am a professor of accounting at Schulich School of Business, and currently I hold the Ron Binns Chair in Financial Reporting, Banking and Governance, and then of course I teach. I've been teaching in the MAcc program, in the MBA program, and in the PhD program. And so those are two of my main lines of duties, but for the past four plus years, I've been the Associate Dean, Students. In this role I am the academic lead for Student Services and International Relations Office, which oversees recruitment and admissions, and financial aid, enrollment, and all the international relations and partnerships.
Cameron: And on top of that, you still have to be able to do your research.
Giri: I have been very fortunate especially the research we are going to talk today comes very closely through one of my PhD students so I think they are actually keeping me on my toes because yeah, we have several of these projects and as you know, Cam, PhD students bring a lot of energy and new ideas.
Cameron: Yeah, there's also a real immediacy about working with PhD students because the clock is ticking for them. You know, we can't decide to just devote ourselves to something else and let them fend for themselves. They require our immediate input because they have to be able to make progress on papers.
They've got a very short time to work on their PhD. For someone who's not familiar with a PhD program, four or five years sounds like an awful long time. But there is an awful lot of work for a PhD student to get through in that time period.
Giri: Very true. And then now four of them graduated in the past three years. And so now they are like assistant professors in universities around the world. And then they have a different clock and then I don't want to be the one holding them back. So yes it's sometimes challenging, but most of the time it's very rewarding.
Cameron: Yeah, I hope it's more than most of the time, it's an extremely wonderful situation to have a good PhD student that you're working with and to watch them make progress through the program and then to get out there and to get a job, so, in many ways it's a privilege for a professor to have PhD students to work with, not the other way around.
Giri: I yeah, I can't agree more.
Cameron: So tell me about the kinds of work that you're doing in this area.
Giri: We started with my PhD student looking at disaster losses or broadly climate risk and how that shapes firms' financial decisions. For example in one of the projects we were looking at loan loss reserves in banks, and so will there be, like, if they're exposed to higher climate risk, will they be building more reserves as a cushion to withstand future disasters? Or, like, how does climate risk impact the overall information environment proxied by analyst forecast accuracy, and dispersion. So is there a lot more noise in analyst forecasts when the firms and analysts are exposed to higher disaster losses? Then, yeah, like I've done lots of work on these informal institutions such as culture or trust, and then we realized, and also in the literature, they're talking a lot about, yeah, these climate actions are not just reaction to past climate risk, but it could, or it should, be that there is a group of firms or managers who believe in climate change, and there are groups who don't believe in climate change, and so these behaviors now can be shown, these different behaviors among these two groups. And then what we find in a couple of the projects, this paper as well as the other projects, is climate beliefs, or we term as climate change social norms, are more salient than the experiences to disaster losses or experiences of past climate risk.
Cameron: So this paper, I'm just going to grab the title of it here. The title is, "Walk the Talk? Climate Change, Social Norms, and Corporate Tax Savings." So this is about the idea if I can try to rephrase what you've said, that when you want to understand whether corporations are taking action on climate change, it's not enough to simply look at the financial aspects of this, but there's also an interaction with broader society, there's an interaction with the beliefs and values of the people who work at the firm. And those are the factors that you're trying to tease out in this study to understand how those things relate to the financial decisions. Is that a fair summary?
Giri: Yeah, like how does the societal beliefs shape managers actions because managers are part of that society.
Cameron: Right. So one way of doing this, if you wanted to study at the firm level, would be to do some sort of a survey of the managers to find out their own beliefs. But that's not exactly what you're doing here.
Giri: That's correct. So that's that would be the perfect identification for this problem. What we are doing is we're doing an indirect way where there are these surveys looking at the societal level at each county in the U. S., what the majority of the people in the county think about a couple of these questions, whether you believe in climate change and proxy that as the beliefs of the managers.
Cameron: Just to be clear for people who aren't familiar with this kind of a study, what do you mean when you say proxy?
Giri: It is like, mapping the society's beliefs to the managers who live in that society.
Cameron: Right, so in other words, you can't go to each of these firms and interview these managers, but what you can do is use this survey result that other people have done, that measures the social norms in their county, and use that as a proxy for the likely beliefs of the managers.
Giri: That's correct.
Cameron: Okay, so maybe what you need to do with me here is just help me understand this other survey that you're using as a proxy. Where did that come from?
Giri: It's the Yale Climate Opinion Surveys, so they started, I believe, in 2014, and every two years, they have this large survey across the entire U. S. at the county level. And the survey has been used in several publications including we have a publication about climate beliefs and cash holdings in Journal of Business Ethics. So the survey has been validated in the research literature.
Cameron: You've got this instrument that measures people's beliefs, this Yale survey. Does it communicate, or capture somehow the Intensity of beliefs or is it just whether or not people have a belief?
Giri: No, it's just yes or no answers. And so you get 80% of the people believe yes or no. Yeah. So intensity is,
Cameron: At the social level, the, the preponderance of the beliefs.
Giri: Yeah, so,
Cameron: Now if there's a, if there's a company that's in an area where there are these strongly held beliefs is there a way to step around those, or like, what is the actual mechanism that you have in mind for the way those societal beliefs will impact the company and change its behavior?
Giri: It's like I was saying I mean, like, you can see, when these beliefs are higher, then there's a causal effect on, say the electric vehicles in that county. So there is high correlation between climate change social norms, and the electric vehicle registration. So they are acting on their personal beliefs into actioning it. And our prediction is that they will make these, prioritize these type of investments within the company as well.
Cameron: I see, okay. So the beliefs are not simply abstract beliefs, there are actually actions to back them up, and therefore you think that's also going to lead to actions at the corporation.
Giri: And because again, when you have this climate risk overall, you have this physical risk and transition risk. And physical risk, you know, you can build bigger cooler storage and stuff like that because your temperature is going up, but then you can also start investing in new ways of cooling, right?
So that is the green investment that might, but that's more riskier, but so you need some impetus, like whether tax incentive or your own beliefs to make that next step.
Cameron: Right. So how deep is the survey in terms of the number of people that participate, like when you talk about a particular county, how many people in that county would have been included in the survey?
Giri: They're, they're looking at about a thousand people at least from each county.
Cameron: From each county? And, you know, I think if my rudimentary understanding of statistics is right from way back when I did stats you know, n equals 30 is like the bare minimum, so if you're talking about a thousand people, that's a pretty good survey.
Photo: Chris Karidis, Unsplash
Giri: Yeah. And then as I said, they have done it over a period of time, so you can see the consistency or longitudinal and what you see is overall the climate beliefs have been increasing and that's not surprising because of course, large climate events and people talking about it and especially U. S. going in and out of Paris Accord and now back again in Paris Accord. So there's a lot of buzz about this. But like you have seen both in U. S., Canada or around the world, climate actually is not a big issue in the coming elections, right? It's about inflation, immigration, employment, economics.
So climate unfortunately is now again on the back burner.
Cameron: In this survey, have you got one particular measure in that survey that reflects the climate beliefs of that county, or is it a composite of several measures?
Giri: So we are using three questions. They ask about 15 questions. So when we use the whole 15 questions or whether we use a combination of the three questions, we get similar inferences.
Cameron: Okay, so you're picking three questions that give you a very good mapping to the overall results. I've got a question then about what it means to map the county to the company. How do you know where a company is located, which county they're in?
Giri: Yeah, so like a large company would operate across multiple counties and states, but they are headquartered, so you can identify the headquarters of a company, and then we are, using the headquarters county as the measure of the societal impact. Of course it could be across... We have another study looking at pollution levels, and so these plants are in many counties.
A firm will have a chemical plant, like a Bayer will have plants in 40 different counties. So then we do analysis at the plant level. But when it comes to like tax decisions or financial reporting decisions, most of it is at the headquarter level. So we are just looking at the social norms of the county in which the firm is headquartered.
Cameron: What size are these companies?
Giri: These are like, like large publicly traded companies.
Cameron: Okay. How many of them have their registered head office at that famous building in Delaware that has, you know, thousands and thousands of companies that are located there for tax purposes.
Giri: Yeah, but their tax headquarters is different from their operational headquarters.
So we are looking at the operational headquarters. Otherwise, yeah you're right.
Cameron: That's a great relief because I was thinking you're gonna get some very strange answers because, of course, out of all those companies that are located in that building in Delaware, not many of them have managers who live in Delaware. The managers are elsewhere. So you're using the operational headquarters.
And so for example, for Apple, that's in Cupertino, California, that sort of thing. Right. Okay. So the operating headquarters, and then you are using the beliefs that you've measured through this Yale survey for the county in which the headquarters is located. And most of the managers are going to live in or around that county.
So that's a pretty good measure of their overall beliefs in the county. Okay. So what we're hoping then is that the average person's thinking about climate change in that county is roughly correlated with the average climate related beliefs of the managers in the company. Now, if they weren't, you wouldn't get any results.
So I'm presuming that they are. Can you tell me about the results?
Giri: Yeah, so what we find is, for the firms in counties with high beliefs or high social climate change social norms, they are paying less taxes. Their effective tax rates are lower. And we,
Cameron: How is that possible, says the naive interviewer.
Giri: Our arguments are that they will more proactively use all the tax credits related to, like, the Inflation Reduction Act or all the different incentives they have through climate. So then we look at these two channels, like one is, are they doing more R&D related to green investments? And second we are looking at whether they are from states which adopted climate change policies. And so we see, yes the R&D is one potential mechanism and then the states which are more proactive about climate regulations and encouragements are also where we see this effect more pronounced.
Cameron: Right. So the effective tax rate. Pretend I'm not an accounting professor, Giri. Explain effective tax rate to me.
Giri: So it's the percentage of tax you're paying for every dollar of profit you make before taxes.
Cameron: Okay, so the tax rate in a given jurisdiction might be, say, 20%, but by taking advantage of tax incentives, perhaps related to climate change, you might be able to reduce the actual amount of tax that you pay to lower than 20 percent. Okay, so that's your effective tax rate. And so you're finding that there's a correlation then between this tax rate, the effective tax rate of the company, and the climate opinions of the people in that county.
Giri: That's right.
Cameron: That's the first thing. And then the second thing is you're trying to figure out what is it that's driving that. So one of them is the research and development.
Can you explain that in a little bit more detail, the research and development part of it?
Giri: Yeah, so like you have lots of credits, tax credits for R&D investments, and then especially green R&D investments.
So we are looking at overall R&D investments, and additionally green R&D investments that results in green patents. Of course there is also another database which we are now trying to access about green jobs. Because you know, like all the oil companies are also doing a lot of R&D, but they may not be like green R&D, right? They could be dirty R&D. So we also want to focus a lot, specifically on the green R&D, not the dirty R&D.
Cameron: And so is there a way to tell?
Giri: Not directly, but then if you look at the outcomes related to green jobs and green patents, then you can see that could be a good way of indirectly finding out how much R&D that is green, versus dirty.
Cameron: Okay, so you've got all these little pieces of data that you can kind of combine together to figure out, is this company taking climate change seriously and really trying to solve the problems that it's a part of?
Giri: And the second one, of course, as I said, not all states in the U. S. adopted the climate action plans. So the firms in the states which have formal climate action plans are also seeing a higher reduction in effective tax rates than the firms in states which have not adopted climate action plans.
Cameron: Mm-hmm. And so again, this goes by where their operating headquarters is located, right? So you can tell which state they're in and therefore what tax incentives might be...
Giri: Because once we map the county, then it's very easy to map the state.
Cameron: Right. Even I can figure that part out, Giri.
So, what did you learn then out of all of this? What's your overall takeaway from this?
Giri: In a research like this as I mentioned before, the general criticism would be, there's nothing to do with beliefs or awareness. It's all because of the climate disasters and heightened climate risk is driving.
So what we do in this research is we clearly show the climate risk actually is not showing any correlation to tax savings, it's the climate beliefs that's having strong relationship to tax savings. So, the prior climate experience of disasters are what we see openly, but the actions are happening, not because of that, but it's because of something else.
It's about the social norms and if you don't believe in it, you are not going to act on it.
Cameron: So, essentially, you need both of those components to be in place. You need good tax policies to incentivize things financially, but you also need to promote the understanding around climate change.
Giri: Exactly. And if you don't have the understanding, or you don't want to have the understanding of the climate change, partly because you could be in a dirty industry too, right? Like, you have your livelihood directly linked to some of these dirty industries, and yeah it's a challenging question, but It's an important question.
When tax incentives are not going to work at all, unless you don't change the minds.
Cameron: I'm from Alberta, so I'm well aware how hard it is to shift the belief system of people who make their living in the oil industry.
So what should tax policy makers take into account because of your study? What should they learn from it?
Giri: These blanket incentives may not work. So it might have to be maybe a targeted incentive. Or you'll have to do the heavy lifting of educating people on the changing the beliefs. And there is no quick fix with the tax incentives.
Cameron: That's what I was wondering. Is it the job of the tax authorities to teach people about climate change? Maybe it is.
Giri: No, it's a job of the government. Like, the Inflation Reduction Act or whatever, Clean Air Act in the U.S., they poured in over a trillion dollars. And they thought that would spur huge investments. Yeah, it has. But in a asymmetrical, unequal way. So, you might be just incentivizing people who would have anyway done it. And you're not changing the minds of people who are not going to do it even with this incentive. So in some ways you are wasting public money when you are only pushing the people who have already changed.
Cameron: It's a very complicated system of mechanisms to try and get people to change their behaviours.
Giri: Exactly. Yes.
Cameron: Where are you going to go next with this research?
Giri: Right now I'm applying for a SSHRC grant and I'm really interested in finding this answer to, as I said, will the firms be proactive or reactive? Whether it's risk management, which is extremely important, say, when it comes to banking industry, which I study a lot, if you are going to be reactive, it will be too late. So if you want financial institutions or firms to be more proactive, maybe, you know, tax incentives alone , or any other incentives, may not work. And so there's no easy solution, but at least you can show that the past experiences really only have like second or third order effect, whereas your beliefs might have much higher order effects in whether it's risk management or whether it's green investments or whether it's reducing pollution.
So I would like to, my objective, or my objective with my team of co-authors, is to build a body of literature to show like solid evidence of the belief. So, for example, there is huge investment on, say, financial literacy. Because it's extremely important. Not many people are talking about climate literacy, right? But that's...
Cameron: ... an interesting phrase.
Giri: Yeah and I think it's a burning issue but it's a slow burning issue, and as you say when inflation or immigration comes up, these things go on the backburner.
Cameron: It's so complicated to figure out how society is behaving, in the first place, as a researcher. And then to try to intervene in some way, to try to promote change in the right direction is an even, perhaps an even bigger challenge because you're up against such intransigent situations.
What can you as a professor do with your research to promote it, to get it out there? Do you get a chance to you know, do you go on media? Do you go to conferences? Do you publish articles in the Globe and Mail? What is it you can do?
Giri: The way I look at, I mean, my banking literature about regulations gets discussed in central bank policy papers and things, and even like government accountability office in the U. S. But when it comes to this climate issue, it's a new research area for me, and I of course go to conferences and present it, and it's much more received in Europe than say in North America, because in North America people still don't really believe in norms, climate beliefs and climate literacy. Again, it's not in the front and center of people's minds, whereas it's very different in Europe. So my objective, of course, is to build a body of evidence. And then talk about it. So it could be like , say you are skeptical about effective tax rates or even societal belief transferring to managerial belief, even though like we have all these difference-in-difference with shocks and saying, you know, there is some causal effect, still it's reasonable to assume there's basically some noise creating these correlations.
But if, we can show this in risk management, in pollution levels, in different contexts, I think then there will be a large body of evidence saying, yes climate beliefs and how societies internalize this climate change over time might spur changes organically from people to firms or incentive designs from governments that will further accelerate some of the changes we need.
Cameron: But it's always possible that the causality goes the other way. If you've got enough employees of the company in one county, they might change the belief systems of the county.
Giri: That's true. And you see that if you go to, say, northern Virginia, you will see 80 percent of the vehicles are green vehicles on the road. You have clusters of these early adopters. And then that becomes like keeping up with the Jones, right?
Everybody else is, so, you want to adhere to that social norm. You don't want to be the odd one out.
Cameron: That's true. So, you've got some opportunities to extend this out into the wider public. Do you ever get a chance to put this into some of your courses that you teach?
Giri: One of my co-authors is in University of Florence and he's teaching a required course on climate finance for all the undergrads at University of Florence. And he wants me to do recorded one hour guest lecture about this research. And,
Cameron: Oh, that'd be great.
Giri: You know, we are a long way from climate finance being a core class in the business program here in Canada or in the U. S.
Cameron: Well, this is a bit like the same situation you're studying in these corporations. You have to look at the belief systems of the managers at the school. What are your belief systems, Giri, around this stuff? Do you want to impose this on the curriculum because you believe so strongly about it?
Giri: No I, yeah. I think all our students have their own objectives passing their CPA and passing their CFA So, yeah, it's, I think we need. We are making these compromises. You know, we have our pet projects and they are important. And actually there is a nice book called Slow Burn, which is out now. If you get a chance, you should read. And it's about how temperature increases. It's like the largest killer of people in the U. S. now. Heat and and microplastics and about climate change, about pollution, they're going to have immediate effect in our lives and that might be recognized as a major problem. I don't know how soon, but it might happen sooner than we think.
Cameron: I think that in many of these issues, our students are actually leaders. They're leading the professors to take these things into account in the classroom and not ignore them.
Giri: True, and I think in some of our curriculum, I think they are being infused, not as a separate topic, but like ESG reporting or ESG investing, all of that are getting taught in bits and pieces in different places. So, like you said, because that's what the students want to learn.
Cameron: Well, Giri, thank you so much for talking to me about your research. It's clearly a hugely important topic, and I'm glad that somebody as smart as you is trying to figure it out.
Giri: Thank you, Cam. Thanks for this opportunity. And thanks for your probing questions.
Cameron: You're very welcome.
Prof. Giri Kanagaretnam (photo credit: York University)
Links
Giri Kanagaretnam’s faculty profile page
LinkedIn: Giri Kanagaretnam
Articles
Fossil fuel divestment strategies
Carbon Costs and Credit Risk in a Resource-Based Economy
Credits
Host and producer: Cameron Graham
Co-producer: Andrew Micak
Photos: York University
Music: Musicbed
Tools: Descript, Squadcast
Recorded: September 24, 2024
Location: Toronto
