Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately?

TLDR

The study evaluates whether corporate climate‑change disclosure and performance information affect asset prices and if it is priced correctly. Using data on GHG emissions for 433 European firms, the authors construct disclosure‑based portfolios and regress them against an extended four‑factor model with industry effects over 2005‑2009. Corporate GHG disclosure and performance are value relevant, allowing investors to earn up to 13.05% abnormal returns, revealing market inefficiency and suggesting that standardized reporting would improve efficiency and capital allocation.

Abstract

Abstract This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative greenhouse gas (GHG) emissions and, to a lesser extent, carbon performance are value relevant. We use hand‐collected information on quantitative GHG emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on a standard four factor model extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk‐adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed, financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy.