Abstract: We offer new evidence on how the application of environmental, social, and governance (ESG) criteria has affected international stock returns. We estimate the market-based equity greenium in a cross-section of 21,902 firms from 96 countries. We find reliable evidence that green stocks earned higher returns than brown stocks around the world. This outperformance is associated with lower stock returns of energy firms but not higher returns of technology stocks. Decomposing this outperformance further into five regions, including North America, Europe, Japan, Asia Pacific, and Emerging Markets, demonstrates that the equity greenium effect mostly occurs in North America and during the period before 2016. Most of the equity greenium performance cannot be explained by exposures to return factors prominent in the asset pricing literature.
Discussant: Laura Starks, University of Texas-Austin
Abstract: We investigate the heterogeneity in investor demand for sustainable equity investing and study its implications. We measure firm-level sustainability across three dimensions: third-party environment scores, emissions, and green patents. Separately estimated institutional investor demands are sensitive to scores and emissions, but not to green patents. We then aggregate these heterogeneous demands in an equilibrium framework to draw implications for the effectiveness of sustainable investing: (i) price-elastic investors do not “undo” effects of sustainable investors, (ii) investor pressure for sustainability only weakly predicts future improvements in firm sustainability, and (iii) incorporating green patents into ESG ratings can be a valuable adjustment.
Discussant: Philippe van der Beck, Swiss Federal Institute of Technology Lausanne
Abstract: We argue for the introduction of firm-level emission futures contracts as a novel way of assessing the real impact of ESG initiatives. Our measure is based on the forward-looking market-based valuation of firm-level CO2 emissions. We introduce a new framework that nests both standard and sustainable investing as it captures both internal and external value. Internal value adds up to the price of the firm and external value adds up to the externalities of the firm. Sustainable investing is investing that increases external value (for example by reducing negative externalities). In a model with sustainable investing preferences and ESG adjustment costs, we show that backward-looking subjective ratings are limited as they are noisy, prone to cheap talk, and often based on thresholds. Empirically, we show that backward-looking subjective ratings are limited as they fail to capture future reductions in emissions. We further show evidence that although lower emissions have predicted higher E ratings, higher E ratings have predicted higher, not lower, emissions. As such, by following these subjective ratings, investors may have inadvertently allocated their money to firms that pollute more, not less. We discuss several applications of our new
measure, including how executive pay can be tied to these futures contracts and incentivize real impact, and how investment managers’ real impact can be evaluated.
Abstract: This paper introduces a new measure of a firm's negative impact on biodiversity, the corporate biodiversity footprint, and studies whether it is priced in an international sample of firms. On average, the biodiversity footprint does not explain the cross-section of stock returns. However, a biodiversity footprint premium (higher returns for firms with larger footprints) began emerging after the UN Biodiversity Conference (COP15). Consistent with this finding, firms with large footprints lost value in the days after the two COP15 events, the Kunming Declaration (October 2021) and the Montreal Agreement (December 2022). The results indicate that investors started to require a risk premium upon the prospect of, and uncertainty about, future regulations to preserve biodiversity.
Discussant: Julian Koelbel, University of St. Gallen
