Companies that adopt climate-friendly business practices are clearly better for the environment. A new research from the US suggests that they are actually rewarded by investors
New Delhi: Companies that adopt climate-friendly business practices are clearly better for the environment—but how does greater climate responsibility affect their share prices? New research from the US suggests that they are actually rewarded by investors.
In a recently published National Bureau of Economic Research working paper, Stefano Ramelli of the University of Zurich and others examine how firms’ climate-related performance affects their stock performance. To show this, they analyse how investors responded to the election of Donald Trump in 2016, an event, they argue, that acted as a significant climate policy shock. In the build-up to his election, Trump promised to scrap several important elements of American environmental and climate change policy. And, unsurprisingly, following his election victory, the authors find that stock prices of firms in carbon-intensive industries, such as coal and steel, increased in anticipation of lax regulation.
More interestingly, the authors find that even climate-responsible firms enjoyed a bump in stock prices. Using data from MSCI KLD, an index for socially responsible companies, they find that firms rated higher for climate responsibility were associated with higher returns following Trump’s election and this differential was sustained in the long run, extending to the end of 2017.
They attribute these results to strategic investors who expected climate-responsible stocks to perform better in the long run. They claim these investors believe that, following the end of Trump’s term and as environment worsens, demand for climate-responsible stocks will rise, and there will be a ‘boomerang effect’ on regulation with more stringent policy to compensate for the current weak regulation. More broadly, the authors use these results to suggest that, contrary to popular depictions of short-term thinking dominating financial markets, there is a significant group of investors who take the long-term perspective.