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: 16 Aug 2018

See all articles by Soh Young In

Soh Young In

Stanford University - Global Projects Center; Stanford University - Department of Civil and Environmental Engineering

Ki Young Park

Yonsei University

Ashby H. B. Monk

Stanford University - Global Projects Center

Date Written: August 7, 2018

Abstract

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 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, Governance (ESG); Low-Carbon Investment; Asset Pricing; Carbon Efficient-Minus-Inefficient (EMI) Portfolio; Socially Responsible Investment (SRI)

JEL Classification: G12; P18; Q5; Q54; Q56

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 (August 7, 2018). Stanford Global Project Center Working Paper. Available at SSRN: https://ssrn.com/abstract=3020304

Soh Young In (Contact Author)

Stanford University - Global Projects Center ( email )

United States

Stanford University - Department of Civil and Environmental Engineering ( email )

CA
United States

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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