In Box: Stocking up on the green stuff

New multinational research involving the University of Otago has found direct links between emissions and company stock prices. In other words, the market itself is now rewarding for good environmental practice by companies. The research prompts questions around the need for an emissions trading scheme.
Associate professor David Lont of the University of Otago’s Department of Accountancy in the School of Business worked on the study with colleagues in the US: research leader professor Paul Griffin of the Graduate School of Management at the University of California, Davis; and Yuan Sun of the University of California, Berkeley.
Together they analysed four years of data (2006-09) on firms listed in the Standard & Poor’s 500; and five years of data (2005-09) for the top 200 publicly traded firms in Canada.
They found that, all other factors being equal, the greater the carbon emissions, the lower company’s stock.
They also discovered that markets respond almost immediately when company reports an event that could affect global climate change, with stock values responding the same day as the disclosure.
“It really does appear to be valuation factor,” Griffin says. “Greenhouse gas emissions are important to investors in assessing companies.”
Lont says the study also has implications for New Zealand. “Similar market reactions in other countries are likely given our findings,” he says. “For example, we find that investors in the US and Canada view estimates of greenhouse gas emissions for non-discloser companies as relevant to the value of stock so I would expect similar results in Australia and New Zealand.
“While New Zealand listed companies such as Contact Energy and Fletcher Building disclose carbon emission information, it is likely those not disclosing would not escape market scrutiny.”
The study bolsters the arguments of investor groups, environmental advocates and watchdog organisations who have been seeking greater disclosure of company actions that affect climate change.
Lont adds that the mandatory disclosure of greenhouse gas emissions from 1 January 2010 for participates in the New Zealand Emissions Trading Scheme (ETS) will ensure more level playing field and help determine the valuation impacts of such emissions more accurately.
In contrast, although the US Securities and Exchange Commission does not require all companies to report greenhouse gas emissions, firms are bound by rule that mandates disclosure of any information material to stock values. Today, about half of large US firms report greenhouse gas emissions through the Carbon Disclosure Project, British organisation representing mostly institutional investors.
The researchers found the link between stock values and greenhouse gas emissions held true in most industries, although the correlation was strongest for energy companies and utilities.
“After controlling for normal valuation factors like assets and earnings, we found the value of stocks to be function of greenhouse gas emissions,” Griffin says.
Many firms file formal notices with the SEC and issue press releases following an event that could affect climate change. The researchers identified approximately 1400 such reported events by firms in the study.
The researchers then tracked movements of stocks on days around when these events were reported.
“We see response on exactly the day you would expect to see it, and that is when the information becomes public,” professor Griffin says.