Abstract

In the past 40 years, 90% of over 2,000 empirical studies have found that there is a non-negative relationship between corporate financial performance (CFP) and environmental, social and governance (ESG), alternatively termed sustainability. A joint Massachusetts Institute of Technology & Boston Consulting Group survey found that more than 60% of investors believe that solid sustainability performance reduces a company’s risks, and almost the same number also strongly believe that it lowers a company’s cost of capital. A recent paper found that ESG ratings predict future news and proxy for market expectations of future news. No study has established investors’ response to a company’s environmental performance.

My study aims to build on the research further, exploring whether there is a connection between positive environmental performance and investors response, as reflected by price premium. The latter may be described as higher price-earnings ratio (P/E), or price-earnings to growth (PEG) ratio, or price-sales ratio (P/S) or enterprise value-sales ratio (EV/S) when compared to industry peers and/or the Hang Seng Composite Index (HSCI).

Environmental key performance indicators candidates include GHG emissions intensity per sales vs industry peers (with data collected from issuers and modelled by a data service provider), environmental penalties, environmental controversies, green revenue, inclusion in sustainability stock indices, environmental awards and accolades, ISO 14000 certification, history of voluntary participation in Carbon Disclosure Project (CDP), environmental scores & percentile vs peers scores, and transparency in disclosure of environmental metrics, traced back from 2014. However, data availability is very low (no data or very short history) for most of the candidates considered.

Through quantitative analysis – regression analysis on a panel dataset, where price data lag GHG emissions intensity data by 12, 18, 24, 30, up to 36 months - I seek statistically significant correlation of price premium and high environmental performance relative to industry peers and/or HSCI. To avoid biases, control variables such as market capitalization and credit standing are introduced.

Simple correlation readings from regressions so far do not significantly support the hypothesis that investors are willing to pay a premium on environmental good performance, although a price discount may be more probable on bad performance. It appears that risk is a more correlated outcome especially when environmental performance is poor, whether recent or up to 3 years ago.

Qualitative findings incorporate insights from institutional investors interviews, to identify behavioural responses and reasons behind such responses. Around 20 asset owners and managers with asset under management totalling US$10 trillion have (will) participated. As initial findings: while fundamentals almost always trump environmental performance (E being only one pillar within ESG and varies by sector), where given similar fundamental, social and governance standings, investors regard environmental performance as material for making investment decisions, particularly when gauging a portfolio company’s sustainability in the longer-term of 3 years and more.