Sustainable Consumption and Production, Climate Change and Firm Performance

Abstract

Transitioning into a resource-efficient and low-carbon emission economy is one of the most critical demands in our modern society. Using TRUCOST environmental and Paris alignment data from the S&P Global Market Intelligence, this study examines the firm-level alignment between ESG scores and firms’ sustainable business practices in consumption, production, and climate change from 2005 to 2018. This study finds that firms’ overall ESG scores are aligned with sustainable consumption, production, and climate action. Specifically, the environmental aspect of ESG is aligned with firms’ sustainable consumption, production, and climate action while social and governance aspects of ESG are not. As investors and corporate managers are paying more attention to firms’ ESG scores, this study provides insights for asset managers who rely on ESG for their investment selection and corporate managers who attempt to improve firms’ ESG performance on sustainable consumption, production, and climate change initiatives. This study also finds strong evidence that firms’ sustainable consumption, production, and climate action offer 0.3% to 0.8% annualized excess stock returns for a one percent increase in firms’ ability to meet these goals. Hence, our findings provide insight into how firms’ sustainable consumption, production, and climate action can impact the investment community as well as firms’ stakeholders.

Keywords: ESG and UNSDG alignment; sustainable consumption and production; climate action; firm performance; stock return

JEL Classification: M14, Q51, Q53, Q55, G11