A UC Davis study, Going Green: Market Reaction to CSR Newswire Releases, has joined a growing body of evidence that it pays to be green. The authors, Graduate School of Management Professors Paul Griffin and Yuan Sun of UC Berkeley, focused on the relationship between companies’ voluntary disclosure of GHG emissions and stock values.
The researchers tracked stock prices of firms around the time these companies voluntarily issued press releases disclosing carbon emission information. Their main finding was that in the days after the press releases were issued, the companies saw their stock prices increase significantly. In other words, disclosing information on GHG emissions benefits shareholders.
As a newly released guide by Calvert Investments, Ceres and Oxfam America states, investors have been concerned about physical climate risks for several years and have actively pursued better climate disclosure from the companies in which they invest. Respectively, companies are more attentive to these growing demands as we can see from the CDP data on the number of companies that respond to its questionnaire. At the same time, there are still many companies that hesitate to disclose their carbon emissions, either because they don’t think it’s a material issue or because they’re afraid of a negative shareholder response. Griffin and Sun’s study might not help the first group of naysayers, but can certainly provide some assurance for the second one.
The researchers used the archives of the CSR Newswire to identify climate change related press releases issued by companies between 2000 and 2010. They used data of 172 companies that made voluntary disclosures on the newswire, tracking the stock changes of these companies from two days before a press release was issued to two days after. The results showed a clear positive effect on the stock prices – Griffin and Sun found that the average stock prices for these 172 companies increased just under a half percent in the five-day span around the disclosures.
The effect was even greater with small companies – their stock prices increased in 2.32 percent. The explanation was that compared with large firms, small firms are not followed as closely by analysts, and investors know less about them, so the release of climate change information would have a more pronounced effect.
To test their findings, Griffin and Sun compared stock movements of the 172 companies they picked to stock shifts of similar firms that did not disclose carbon emission information during the same time periods. They found that companies that did not disclose climate change information did not see a statistically significant increase in values. “The matched sample companies do not behave the same way as the companies that disclose,” Griffin said. “If anything, in the matched sample, the price runs in the opposite direction.”
If you’re into investments, you might be wondering if investors can exploit this information to make a buck or two. Well, according to the researchers the answer is no. They constructed a portfolio that was long in companies with low information availability (i.e. smaller companies) and tested for a significant hedge portfolio abnormal return over three months before and/or three months after the CSR disclosure. They found no evidence of an abnormal hedge portfolio return over these intervals, which they claim is another way to conclude that investors recognize the benefits of climate change disclosures efficiently and without bias, although measurement error could explain this result.
The study adds to the information we already have from the CDP, which claims that companies that are strategically focused on accelerating low carbon growth – i.e. those in its Carbon Performance Leadership Index (CPLI) – tend to perform better, not only in terms of greenhouse gas emissions management, but also in terms of financial performance, providing approximately double the average total return of the Global 500 between January 2005 and May 2011.
In addition, the study also joins a growing list of studies that suggest positive relationships between ESG and financial performance. For example, PwC reports that following a request from California Public Employees’ Retirement System (CalPERS), Mercer examined the link between ESG issues and financial performance through existing academic and broker research. Of 36 studies Mercer reviewed through 2009, 86 percent show either a neutral or positive impact of ESG factors on risk and return. And there’s also the widely cited new Harvard Business School white paper, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, which found that sustainability leaders “significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.”
While Griffin and Sun’s research certainly shows that greater environmental transparency is viewed positively by shareholders, there is still a need for further research to find out how the quality of the data or its positiveness/negativeness affects investors. It also would be interesting to see long-term influence of such data on the stock value. Still, it’s important research affirming the message is that it pays to be green. Now, we just need to see if companies will listen.
Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is an adjunct faculty at the University of Delaware’s Department of Business Administration, CUNY and the New School, teaching courses in green business and new product development.