Does the Market Value Environmental Performance?

TLDR

Previous studies linking environmental to financial performance have produced conflicting results due to small samples and subjective criteria. This study examines the relationship between S&P 500 firms’ market value and objective environmental performance measures. Controlling for traditional financial variables, poor environmental performance is negatively associated with intangible asset value; a 10 % reduction in toxic emissions raises market value by $34 million, with larger effects in polluting industries.

Abstract

Previous studies that attempt to relate environmental to financial performance have often led to conflicting results due to small samples and subjective environmental performance criteria. We report on a study that relates the market value of firms in the S&P 500 to objective measures of their environmental performance. After controlling for variables traditionally thought to explain firm-level financial performance, we find that bad environmental performance is negatively correlated with the intangible asset value of firms. The average 'intangible liability' for firms in our sample is $380 million—approximately 9% of the replacement value of tangible assets. We conclude that legally emitted toxic chemicals have a significant effect on the intangible asset value of publicly traded companies. A 10% reduction in emissions of toxic chemicals results in a $34 million increase in market value. The magnitude of these effects varies across industries, with larger losses accruing to the traditionally polluting industries.