Can Local Governments Crowd Out Corporate Sustainability Progress?

Local governments play an important role in shaping the environmental behavior of firms headquartered in their communities. Through permitting, enforcement, procurement, land-use policies, building and resilience codes, and clean-energy standards, they influence firms' resources and incentives to invest in environmental sustainability. Recent research in finance, accounting, and management has highlighted the role of local governments in regulating, supervising, and pressuring local firms to promote sustainability, and has even found that the sustainability policies of local governments and firms can complement one another. 

However, classic public-goods theory points to another possibility: when governments provide—or pledge to provide—more of a public good, private actors may contribute less. Can stronger local-government engagement in environmental sustainability similarly crowd out corporate sustainability progress? In our study, presented at the Finance Conference Day of Lisbon Sustainability Week 2026, we investigate this question.

Wildfires as Salience Shocks

Empirical identification is challenging, since local government policies and corporate ESG initiatives may be jointly driven by contemporaneous local factors that are unobserved to researchers. To this end, we exploit salience shocks from wildfires across U.S. counties between 2003 and 2016, corroborating our findings with an out-of-sample analysis of Australian local government areas through 2023. Wildfires are frequent, highly visible, and closely tied to climate risk. Because they typically ignite in forested or wildland areas rather than at corporate facilities, they serve as an acute environmental wake-up call, heightening stakeholder salience while limiting concerns about confounding operational disruptions.

As residents, employees, investors, and corporate decision-makers confront tangible environmental damage, pressure on local firms to adopt more sustainable practices increases. We can then test whether the magnitude of this corporate response depends on the extent of local-government environmental commitment.

Wildfires and Corporate Sustainability Progress

In our analysis, we measure wildfire severity by the fraction of an area's land that is burned and local corporate environmental sustainability progress by the average annual change in the environmental sustainability ratings of listed firms headquartered in each area, weighted by firm size. 

Our first finding is that severe wildfires are followed by greater local corporate environmental sustainability progress: a wildfire of average severity increases the latter by about 42% relative to its average level. Using the Hot-Dry-Windy Index, an atmospheric predictor of wildfire potential, as an instrument yields an even larger estimate, supporting a causal interpretation.

However, the corporate response to wildfires is far from uniform. We collect data from ICLEI – Local Governments for Sustainability, a global network through which local governments participate in voluntary environmental programs. Such participation reflects the underlying environmental preferences of local constituencies, since local governments are more likely to join when public demand for environmental action is strong.

We find that the positive corporate response to wildfire severity is concentrated in areas associated with ICLEI. Similar patterns emerge when distinguishing areas by climate-change beliefs, political preferences, and public pressure for climate protection. Together, these findings indicate that wildfires do not create new environmental preferences but rather heighten the salience of existing community concerns.

When Government Commitment Crowds Out Corporate Progress

The key result emerges when we look within areas whose local governments participate in voluntary environmental programs. Our theoretical framework captures stronger government commitment as greater publicly provided environmental investment, financed through a larger levy on firms' stakeholders. The larger levy leaves firms with fewer resources to finance their own sustainability investments—the classic crowding-out mechanism.

Consistent with this prediction, we find that the positive corporate response to wildfire severity is considerably stronger where local-government environmental commitment is low or absent. Conversely, where local-government commitment is high, the corporate response is largely muted. This pattern holds whether commitment is measured via climate-action commitments, performance, and milestones reported to ICLEI or through independent municipal surveys of elected officials and staff.

What enables firms to respond when local-government commitment is limited? We examine the environmental experience of corporate directors, green institutional ownership, and the political preferences of firms' employees and CEOs. Across all three, the pattern is consistent: wildfires lead to greater corporate environmental sustainability progress only where the corresponding local stakeholder measure is high. These findings highlight environmental stakeholder pressure, green investment, and human capital as key channels of corporate responsiveness in the absence of strong government commitment.

What Should Local Governments Do?

In an extension of our framework, we model the local government as a Stackelberg (first-mover) leader that chooses its environmental commitment while anticipating how local firms will respond. The model predicts that severe wildfires should increase the optimal environmental commitment of a local government participating in voluntary environmental programs, because the response from local firms alone is insufficient to achieve its preferred level of total environmental investment.

Yet we find little evidence that governments respond this way. Wildfire severity does not predict meaningful changes in local climate commitments, ICLEI affiliation, or political partisanship. This lack of adjustment suggests that political-economy frictions may constrain public responses precisely when environmental risks become most salient.

These findings carry an important policy implication: if the goal is to encourage corporate sustainability progress following an environmental disaster, stronger local-government commitments may not always be the answer. When environmental risks are already highly salient, temporarily deemphasizing some commitment instruments—or easing the local tax burden on firms through abatements, credits, or deferrals—may leave greater scope for firms to respond. The broader lesson is that public and private sustainability efforts need not always reinforce one another; effective environmental policy requires accounting for how firms adjust their own contributions when governments change theirs.

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Ioannis Branikas is an Assistant Professor of Finance at California State University, Northridge.

Gabriel Buchbinder is a Data Scientist at the Department of Health Economics and Investments of the Brazilian Ministry of Health.

Yugang Ding is an Associate Professor of Finance at Guangdong University of Foreign Studies.

Nan Li is an Assistant Professor of Accounting at the University of Toronto Scarborough.

This blog is based on a paper presented at the Finance Conference Day of Lisbon Sustainability Week 2026, held at Católica-Lisbon School of Business and Economics and organised with Santander Central Services and ECGI. Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.