Institutional Drivers of Voluntary Carbon Reduction Target Setting—Evidence from Poland and Hungary

Abstract

Governments worldwide have launched climate policies to mitigate greenhouse gas emissions (GHG). These policies aim to enhance businesses to be active actors in the process of decarbonisation. Therefore, the main objective of this paper is to identify the drivers of voluntary corporate decarbonisation illustrated by climate target-setting practices. In particular, this paper aims at diagnosing whether European Union (EU)-wide and country-level policies foster material corporate commitment to mitigating the carbon footprint in two countries that are exceptionally heavily dependent on fossil fuels: Poland and Hungary, which are characterised by a specific political-economic situation. This analysis focuses on policies related to the EU sustainable finance initiative that enhances companies to voluntarily reduce their GHG emissions: (1) sustainable financial sector, (2) corporate disclosure, and (3) corporate governance policy. At the country level, the national policies for state-owned enterprises (SOEs) are analysed. The empirical research is conducted based on the financial and economic data for a group of Polish and Hungarian publicly listed companies exposed to these regulations. The exposure to certain policies is approximated through selected corporate characteristics. Logistic regression analysis is applied to firm-level data gathered from Refinitive and corporate reports. The dataset covers the period 2014 to 2021, with 214 data-points. The response variable is a binary indicator of whether a company sets emission targets. The empirical research proved that state ownership, belonging to the financial sector, and performance-oriented corporate governance factors have a significantly negative impact on the probability of a company setting target emissions. On the other hand, the company’s size and leverage have a strong positive impact on the probability of setting emission targets. Also, it was confirmed that after 2020 the frequency of corporate target-setting in Poland and Hungary increased. Additionally, it was observed that Polish firms are more willing to set climate targets than Hungarian ones. Therefore, from the analysed policies, only the corporate sustainability disclosure policy proved to have a positive impact on the practices of setting climate targets in Polish and Hungarian firms. The policies related to the sustainable financial sector and to state-owned enterprises proved to have a negative impact on the probability of setting climate targets, while for the corporate governance policy, the results are mixed. In this vein, it was shown that, by a majority, policies to stimulate voluntary corporate commitment to decarbonisation are counter-effective in countries characterised by exceptional fossil fuel dependence and particular institutional features. The original value of this study stems from the applied methodology focusing on a mix of policies addressing the deep decarbonisation process in the specific country settings. The presented research contributes to an on-going debate on the drivers of voluntary corporate decarbonisation, in particular the impact that policy mixes framed under the sustainable finance agenda may have on material commitments to GHG emission reduction targets. In this context, the main findings are important for policymakers who are responsible for creating and implementing policy measures devoted to the deep decarbonisation process. It is recommended that policymakers should consider national specificities while designing policies for a Europe-wide net-zero transition and account for potential tensions arising from different goals as they may have impact on the effectiveness of the decarbonisation process. Future research may focus on the verification of the observed relationships between variables on a larger sample of the European firms to identify the key drivers of deep corporate decarbonisation.