Shareholder Preferences and Pollution Outsourcing

Pollution activities, known to produce negative externalities, necessitate effective regulation. However, the practice of outsourcing pollution undermines the effectiveness of nationwide controls. While policymakers often discuss pollution relocation and carbon leakage, firm-level evidence remains limited due to data constraints. This study aims to bridge the gap by providing systematic, firm-level evidence of pollution outsourcing driven by financial market mechanisms.

U.S. firms are subject to strict environmental regulations by the U.S. Environmental Protection Agency (EPA) and financial market participants, as evidenced by the Environmental, Social, and Governance (ESG) trend. However, US firms can offshore production to countries with less stringent environmental policies, like China. This creates an incentive for firms to reduce domestic production of toxic emission-generating products and source them from firms operating in regions with more lenient environmental standards.

Firms function to maximize shareholder value, and when shareholders prioritize the environment, they can influence management. However, they may only consider the domestic environmental impact, overlooking the international effects of corporate decisions. This bias could stem from the fact that shareholders bear the environmental consequences within their own country, but are insulated from the polluting activities in a remote country.

In this proposed study, we plan to use detailed US import transaction data to estimate the impact of environment-related proposals submitted by shareholders on a firm's pollution outsourcing activities. We hypothesize that firms adjust their productions and source products that require toxic emissions from countries with lenient environmental standards. To investigate the resultant pollution activities of global suppliers, we focus on the major trade partners, US and China. We aim to match the rich suppler information in the US import transaction data with China’s firm census and pollution database. We further gauge the health risks induced by these outsourcing activities for local residents in the regions where the suppliers are located.

This study represents a contribution to the discourse on environmental policy and global climate change. It explores how financial market mechanisms can drive pollution outsourcing, a largely unexplored topic. If U.S. firms are found to be outsourcing pollution to countries with more lenient environmental standards, it could necessitate a reassessment of what it truly means for a firm to be 'green' within the ESG trend. The study highlights the need for environmental rules that cover both domestic and international issues effectively.