Study finds greenhouse gas emission disclosures significantly affect company stock price



How much greenhouse gas a company produces has a significant effect on the value of the company\’s stock, according to an extensive multi-national research project involving the University of Otago.

Professor Paul Griffin of the Graduate School of Management at the University of California, Davis, led the study.

He and his colleagues Associate Professor David Lont of the University of Otago’s Department of Accountancy in the School of Business and Yuan Sun of the University of California, Berkeley, 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.

The researchers found that the greater the carbon emissions, the lower a company\’s stock, all other factors being equal.

They also discovered that markets respond almost immediately when a 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 a valuation factor,” Professor Griffin says. “Greenhouse gas emissions are important to investors in assessing companies.”
Associate Professor Lont, from the University Of Otago School Of Business, 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,” he says.

“For example, 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, recently posted on the Social Science Research Network web site, bolsters the arguments of investor groups, environmental advocates and watchdog organisations that have been seeking greater disclosure of company actions that affect climate change.

Associate Professor 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 a more level playing field and help determine the valuation impacts of such emissions more accurately.

In contrast, although the U.S. Securities and Exchange Commission does not require all companies to report greenhouse gas emissions, firms are bound by a rule that mandates disclosure of any information material to stock values. Today, about half of large U.S. firms report greenhouse gas emissions through the Carbon Disclosure Project, a British organisation representing mostly institutional investors.

The researchers developed mathematical models to analyse the exhaustive data. They found the link between stock values and greenhouse gas emissions to hold 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 a function of greenhouse gas emissions,” Professor 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 1,400 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 a response on exactly the day you would expect to see it, and that is when the information becomes public,” Professor Griffin says.