Jeeho Sohn

The hidden cost of environmental policy uncertainty

Katelynn C Hipolito — Tue, 21 Oct 2025 15:30:50 +0000

The hidden cost of environmental policy uncertainty Katelynn C Hipolito Tue, 10/21/2025 - 11:30

Air quality standards do more than reduce pollution for noncompliant counties; they increase the cost of funding public infrastructure like schools, hospitals, and roads.

Air pollution regulations are meant to protect public health, but new evidence shows they also carry an unexpected cost: higher interest rates on the bonds counties issue to fund schools, hospitals, and infrastructure. When a county falls out of compliance with federal ozone standards, borrowing becomes expensive. The result is that the municipality faces higher costs to fund public infrastructure like schools, hospitals, and roads.

Stephen A. Karolyi

That is the central finding of a study published in Management Science, authored by Stephen A. Karolyi, a finance professor at Costello College of Business at ��, and co-authors Akshaya Jha and Nicholas Z. Muller of Carnegie Mellon University.

The study focuses on how the municipal bond market responds to the Clean Air Act, which sets thresholds for pollutants like ozone. The official term for exceeding the threshold for ozone pollution is “nonattainment.”

“If your county is not compliant with this federal standard, then there are repercussions. You have to create a plan to get back in attainment,” explains Karolyi. Prior work has shown how these federal standards generate significant health benefits relative to these compliance costs.

But for investors in municipal bonds, this raises two concerns: higher default risk due to strained county finances, and uncertainty about how regulations will evolve.

The researchers focused on two critical types of announcements. First is when the EPA proposes and finalizes new ozone standards. Second is when the EPA releases its annual designations of which counties are in or out of attainment. Together, these announcements create information shocks that allow researchers to track how bond markets update their expectations. The team measured changes in municipal bond yields surrounding the two types of announcements, analyzing more than 140 million trades between 2005 and 2019.

“Because municipal bond investors dislike uncertainty, one implication would be that policymakers should be concerned not only with the level of air quality standards, but also uncertainty over changes in air quality standards.”

The results reveal a consistent pattern. When new standards were proposed, yields rose by one to four percent, reflecting an increase in uncertainty perceived by investors. Once the final standard was announced, the estimated yields fell by about 0.5 to 1.3 percent, due to a corresponding decrease in uncertainty. When analyzing the annual compliance announcements, the authors found that counties that slipped into nonattainment experienced an increase in yields of nearly one percent, compared to counties that maintained their status or newly achieved attainment.

“Being non-compliant means that you’ll have to create and execute abatement plans, which bondholders expect to be costly,” explains Karolyi. Those expectations push yields higher, which makes it more expensive for counties to fund public infrastructure projects and services, though the current study does not explore all possible channels that are impacted.

The research shows that these expectations are well-founded. Karolyi explains, “When the bond market reacts more negatively to annual compliance announcements, we see larger decreases in house prices over the subsequent years. That’s consistent with the perceived cost of getting back into attainment. As a county, in order to get into attainment, one approach may be to restrict output, which may mean less employment and consequently a decrease in house prices.”

The implications are wide-ranging. For policymakers and local leaders, the findings underscore that environmental regulations also have repercussions for public finance. For investors, the findings highlight how traditionally safe assets like municipal bonds are sensitive to environmental policy risk.

Looking ahead, the researchers plan to extend their work to other areas where environmental rules intersect with local finance. Commercial real estate, for example, is an emerging area of interest as cities experiment with new sustainability requirements.

By examining how financial markets respond to environmental regulation, the team hopes to shed light on the hidden economic tradeoffs and potential unintended consequences of well-intentioned policies. To be sure, prior work has documented that more stringent air quality standards have generated billions of dollars in public health improvements. According to Karolyi, a key contribution of this paper is to show that these benefits come about in part due to investors anticipating the effects of standards and the costs of noncompliance.

“Because municipal bond investors dislike uncertainty, one implication would be that policymakers should be concerned not only with the level of air quality standards, but also uncertainty over changes in air quality standards,” Karolyi says.

In This Story

Stephen A. Karolyi

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Finance - Costello

Costello Research Risk Management

Costello Research Corporate Finance

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Research

“Doing well by doing good”? There’s a framework for that

Jennifer Anzaldi — Wed, 02 Jul 2025 15:38:03 +0000

“Doing well by doing good”? There’s a framework for that Jennifer Anzaldi Wed, 07/02/2025 - 11:38

Today’s customers don’t just buy products—they buy into what a company stands for. It is no longer just low prices or flashy marketing that target the latest trends. Stakeholders are asking harder questions: Does this company treat its workers fairly? Are they harming the environment?

In a recent study published in the Journal of Brand Management, Russell Abratt, a marketing professor at the Costello College of Business at ��, tackles a key strategic challenge: How companies can move beyond shallow social and environmental messaging to meaningfully shift consumer perceptions. Joining Abratt on this research team are co-authors Emmanuel Silva Quaye of University of Witwatersrand and Nicola Kleyn of University of Pretoria.

Russell Abratt

When a brand is described as being true to themselves, holding values of fairness, a concern for society, and an obligation to goodness, it becomes what they call a conscientious corporate brand. These are brands who are trusted to do the right thing consistently and authentically.

But trust alone is not enough. Companies want to know: Does being conscientious also deliver better business outcomes?

Building on their 2023 work, which introduced a framework for developing conscientious corporate brands, the research team now offers empirical evidence that this framework not only enhances brand trust but also leads to the response companies are hoping for—responsible branding can drive tangible value.

“Firms in order to succeed these days really need to go beyond profits,” says Abratt. “You’ve got to be ethical in whatever you do. You’ve got to be socially aware. And you’ve also got to be very, very conscientious about what you are doing.”

To further investigate Abratt’s 2023 framework and understand what changes stakeholder perceptions, the researchers conducted two experiments with South African participants. Each participant was shown a scenario involving a fictional construction company: the control group highlighted traditional business goals such as efficiency and profitability, and the experimental group emphasized ethical leadership, social impact, and environmental sustainability. The results were striking.

“We saw very clearly the differences between the control group and the experimental group,” Abratt explains. Participants viewed the purpose-driven, socially engaged version of the company as significantly more conscientious, responsible, and authentic than the version focused purely on business efficiency.

Their research identified four elements in a chronological sequence that contribute to conscientious corporate branding: organizational purpose, brand authenticity, corporate social responsibility (CSR), and ethical organizational culture. These are not separate strategies; they reinforce each other.

The first element of this sequence is organizational purpose. A company must begin by defining why it exists beyond just profits. Next is authenticity. “Authenticity leads to trust,” says Abratt. “The more authentic that an organization is perceived to be, the more positive perceptions the stakeholders have.” The paper finds that authenticity acts as a bridge that connects an organization’s purpose to stakeholders’ perceptions of conscientious corporate branding.

Next is the third element: corporate social responsibility. This must be integrated, not performative. “Developing a corporate social responsibility strategy should be part of the organization’s overall strategy,” says Abratt. “It should not be seen as greenwashing, as added on and fake.”

Lastly, an ethical organizational culture is created by top leadership through example and prioritizing ethical values across the organization.

According to Abratt, “In order for a firm to say this is our purpose beyond profits, they’ve got to have a top leadership that says these are our values. This is what we stand for. Then that needs to be typicalized throughout the organization.”

So what does this mean for business leaders? It means that building a conscientious brand is no longer just a marketing strategy—it’s a business imperative. But the real challenge lies in making sure those sustainable actions resonate with consumers to ultimately result in success. Can companies do well by doing good?

Looking ahead, Abratt and his colleagues hope to expand their research to other industries and other countries or regions to test whether their results are generalizable to other contexts.

“Brands that have a purpose beyond profit are the ones that are going to be seen by stakeholders in a more positive light. And if they are seen in a more positive light, those stakeholders, especially customers, are likely to support that particular organization,” Abratt concludes.