Is 'Being Green' Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns

Stanford Global Project Center Working Paper

57 Pages Posted: 21 Aug 2017 Last revised: 19 Apr 2019

See all articles by Soh Young In

Soh Young In

Global Projects Center, Stanford University; Precourt Institute for Energy, Stanford University

Ki Young Park

Yonsei University

Ashby H. B. Monk

Stanford University - Global Projects Center

Date Written: April 16, 2019

Abstract

Climate change could have potentially devastating effects on societies and economies globally, and climate finance to combat the challenges related to it demands large-scale capital. However, this form of investment has been hampered by the unclear relationship between corporate environmental performance and financial performance. To address this, this study empirically investigates the risk-return relationship of low-carbon investment and characteristics of carbon-efficient firms. Based on 74,486 observations of 736 US firms from January 2005 to December 2015, we construct a carbon efficient-minus-inefficient (EMI) portfolio by carbon efficiency, defined as revenue-adjusted greenhouse gas (GHG) emissions at the firm-level. Our EMI portfolio generates positive abnormal returns since 2010 and an investment strategy of "long carbon-efficient firms and short carbon-inefficient firms" would earn abnormal returns of 3.5-5.4% per year. The only exception is found in small firms. We find that these carbon-efficient firms tend to be "good firms'' in terms of financial characteristics and corporate governance. Our findings are not driven by a small set of industries, variations in oil price, or changing preferences of bond investors caused by the low-interest-rate regime, starting with the 2008 financial crisis.

Keywords: Environmental Social and Governance (ESG), Socially Responsible Investment (SRI), Low-Carbon Investment and Sustainable Finance, Asset Pricing, Carbon Efficient-Minus-Inefficient (EMI) Portfolio, Portfolio Management, Investment Strategies

JEL Classification: G12, G30, P18

Suggested Citation

In, Soh Young and Park, Ki Young and Monk, Ashby H. B., Is 'Being Green' Rewarded in the Market?: An Empirical Investigation of Decarbonization and Stock Returns (April 16, 2019). Stanford Global Project Center Working Paper. Available at SSRN: https://ssrn.com/abstract=3020304

Soh Young In (Contact Author)

Global Projects Center, Stanford University ( email )

473 Via Ortega, Suite 242
Stanford University
Stanford, CA 94305
United States

HOME PAGE: http://https://gpc.stanford.edu/

Precourt Institute for Energy, Stanford University ( email )

473 Via Ortega, Suite 324
Stanford University
Stanford, CA 94305
United States

HOME PAGE: http://https://energy.stanford.edu/

Ki Young Park

Yonsei University ( email )

Yonsei University
Seoul
Korea, Republic of (South Korea)

Ashby H. B. Monk

Stanford University - Global Projects Center ( email )

United States

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