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

Stanford Global Project Center Working Paper

54 Pages Posted: 21 Aug 2017 Last revised: 29 Aug 2019

See all articles by Soh Young In

Soh Young In

Korea Advanced Institute of Science & Technology (KAIST); Stanford University - School of Engineering

Ki Young Park

Yonsei University

Ashby Monk

Stanford University

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); Sustainable Finance; Low-Carbon Investment; Multi-Factor Asset Pricing Model; Carbon Efficient-Minus-Inefficient (EMI) Portfolio

JEL Classification: G12, G30, P18

Suggested Citation

In, Soh Young and Park, Ki Young and Monk, Ashby, 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)

Korea Advanced Institute of Science & Technology (KAIST) ( email )

291 Daehak-ro, Yuseong-gu
Daejeon, 34141
Korea, Republic of (South Korea)

Stanford University - School of Engineering ( email )

Stanford, CA 94305-9025
United States

Ki Young Park

Yonsei University ( email )

Yonsei University
Seoul
Korea, Republic of (South Korea)

Ashby Monk

Stanford University ( email )

United States

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