Critical Raw Materials: Risk, Transition, and Pricing
Critical Raw Material Dependency and Asset Pricing
We construct the first firm-level measure of exposure to critical raw materials (CRMs), inputs marked by extreme supply concentration and limited substitutability. We develop a production-network framework that traces material-specific flows through global product-level supply chains, showing that the product of cost shares along each supply-chain path summarizes a firm’s CRM vulnerability. We use large language models to transform this theoretical object into empirical measures. Event studies around trade shocks validate the measure and show that markets price both the intensity and material composition of CRM exposure. We further document the asset-pricing implications of CRM exposure at the aggregate and firm levels.
International Trade in Brown Assets
Resistance and Arbitrage: International Trade in Brown Loans [Draft]
Yihong Xia Best Paper Award, CICF 2025
I develop a novel measure of carbon sensitivity in lending to assess reductions in portfolio exposure to brown assets. Using syndicated loan data, I show that countries with greater resistance to brown lending, proxied by economic development, experience faster shifts in the sectoral composition of loan portfolios. The decarbonization is driven primarily by domestic credit reallocation. I find consistent evidence of risk transfers to less regulated lenders and foreign countries, indicating arbitrage and incomplete regulations. Furthermore, lenders’ climate risk-taking and transfer behaviors vary sharply by syndicate role, loan type, and specialization. The existence of international trade in brown loans has important implications for supervisory evaluation. Using the European Central Bank’s climate guide, I show that accounting for regulatory leakage reveals effects contrary to common wisdom.
International ownership of brown shares and economic development
Using global share-ownership data for 2002–2021, we study how carbon-intensive firms come to be owned across countries and how this affects their environmental outcomes. Richer countries tilt away from carbon-intensive firms more than poorer countries do. Because shares must be held, market clearing leaves more of these firms in poorer-country hands. This poorer-country ownership predicts higher subsequent emissions and ESG incidents. We show that rich-country fossil-fuel divestment pushes firms toward such ownership, followed by worse environmental outcomes. Climate-motivated exit, by reallocating these firms toward less environmentally inclined owners, can work against the goal it serves.
ESG and Corporate Control
When ESG information drives control: evidence from M&A deals
We study whether and how ESG information affects the allocation of corporate control using mergers and acquisitions. Conditional on deal occurrence, firms with an ESG information advantage are more likely to acquire control, consistent with higher expected synergy. While existing M&A research primarily emphasizes governance gains, we show that environmental comparative advantage is a major determinant of the M&A direction. The impact of ESG information on control allocation is amplified in countries with stronger institutional quality and information environments. Additionally, ESG-informed firms are more likely to assume control when markets have rewarded ESG-informed firms that recently undertook M&As. Event-study results reveal asymmetric market perceptions of ESG information for acquirers and targets. The value added of ESG-informed control may also arise from reduced within-deal uncertainty, as stock financing is less likely and less intensive in such deals. Our result that ESG-informed firms are more likely to take control over traded assets implies that used asset trade can serve as a mechanism for reallocating control from less to more environmentally capable firms, facilitating the green transition.