Long gone are the days when companies proceeded without concern for the environmental impact of their operations. Firms now think in terms of a “triple bottom line” of economic, social, and environmental concerns. Still, we might assume that these concerns conflict with one another—that when firms prioritize environmental concerns, capital markets respond negatively. But, in fact, in a recent study with Rachna Prakash of the University of Mississippi and Sandra C. Vera-Muñoz of the University of Notre Dame, I found the opposite: the markets penalize firms with high carbon emissions, as well as those that decline to disclose their emissions levels.
We examined data for all S&P 500 firms that reported their carbon emissions to the Carbon Disclosure Project from 2006 to 2008, before the Environmental Protection Agency’s greenhouse gas mandatory reporting rule took effect in 2009—meaning that all emissions disclosures captured in our data were voluntary. (This rule only affected fossil fuel and industrial gas suppliers, direct greenhouse gas emitters, and manufacturers of heavy-duty and off-road vehicles and engines, so reporting is still voluntary for most U.S. companies.) From this data set, we matched firms with other similar firms in terms of industry, size, proportion of foreign sales, and a number of other criteria, allowing us to compare high-emissions firms with low-emissions firms as well as firms that disclosed with those that didn’t. We found that, on average, for every additional thousand metric tons of carbon emissions, firm value decreases by $212,000, and that the median value of firms that disclose their carbon emissions is about $2.3 billion higher than that of comparable nondisclosing firms.
Our results indicate that the markets penalize all firms for their carbon emissions, but a further penalty is imposed on firms that do not disclose emissions information. We conjecture that these penalties come about because investors expect that companies with high emissions will eventually be penalized by regulatory authorities and/or forced to reduce their emissions (and pay the cost of doing so). Investors may also be rewarding firms for compiling and reporting emissions information themselves rather than forcing analysts—or the investors themselves—to undertake this costly and time-consuming research. Moreover, firms that report carbon emissions let the public know that these firms have taken the important first step necessary for managing emissions: measuring emissions.
This research was chosen as the topic of a report for KPMG’s Global Valuation Institute series, which presents academic research findings for an audience of business professionals, so that advances in research can be incorporated into valuation thinking and practices. We are pleased that our research will gain wider reach as people access the report on the KPMG website and learn from these findings on the benefits of reducing carbon emission levels.