It’s not yet clear how effective the United Nations conference underway in GlasgowThe most important task will be to mitigate the most dangerous effects of global heating. One outcome is already clear: The number and quality of articles on climate change is increasing.
The conference in Glasgow will also have a positive outcome. So-called green stocks — those of companies with relatively low carbon emissions — will get a temporary boost. At the same time, brown stocks — those of companies that emit large quantities of greenhouse gases — will face a headwind.
Recent research shows that these effects are linked. Two economists have recently published three papers that suggest that investor preferences shift when climate change information is made more widely. This can alter the performance of certain sectors of the stock exchange.
“What we’ve found is a story about climate change and the stock market,” Lubos PastorProfessor of Finance at the University of Chicago Booth School of Business said this in an interview
“At this point, news about climate change, any news, is, at least to some extent, negative,” he said, meaning that it tends to raise public concern about the future of the planet. “As investors become more aware of the climate issue, they understand that regulations are coming, and that the situation will be beneficial to green firms and harmful to brown ones.”
That increased public attention — and the accompanying preference of many investors for environmentally sensitive stocks — boosts the price of those stocks and hurts those of companies that are big emitters of carbon dioxide, methane and other greenhouse gases, the scholars found. It is easier and cheaper to raise funds for environmentally beneficial projects because of this preference for green companies by investors, they said.
But for people who want to do well while doing good, the researchers’ findings may not be entirely comforting.
For one thing, the very preference of many investors for green stocks — which creates a measurable green premium, or “greenium,” that elevates their share price — implies that these shares will have lower expected returns in the future. That’s just what happens in financial markets when demand for an asset soars and supply does not: Its price rises over the short run but, all else equal, it has less room for increases down the road. .
“We’d say with this green preference, the market reaches a new equilibrium,” said Robert F. StambaughAn economist at the Wharton School of the University of Pennsylvania. “By pricing green stocks higher, investors are accepting lower expected returns, whether they understand that or not.”
The opposite is also true. Obviously, fossil fuel stocks can still rise sharply amid an energy shortage — as they have been doing in recent months — even if there is increasing investor preference for alternative energy companies and other green stocks. Professor Stambaugh suggested that by placing a premium on green stocks and shunning brown stocks, environmentally conscious investors might be inadvertently increasing the expected returns for brown stocks. Investors who place a high value on making money over the environment may be drawn to brown stocks as long as they continue to produce profits and cash flows.
The core of these insights appears in “Sustainable Investing in Equilibrium,” publishedThis month in the Journal of Financial Economics. working paperSince December 2019. Also available: Lucian TaylorPastor, a Wharton professor, and Professor Stambaugh were also involved in the paper. They developed the model that explains why shifting investor preferences can lead to stock market shifts and share re-pricing.
Two papers that were published after the original theory was confirmed by them provided additional evidence.
The first, “Climate Change Concerns and the Performance of Green Versus Brown Stocks,”The National Bank of Belgium was a group of economists who wrote the book. They are David ArdiaHEC Montreal Keven Bluteau of Université de Sherbrooke, Kris Boudt and Koen Inghelbrecht University of Ghent
They constructed a “Media Climate Change Concerns index” that measured the frequency and tone of climate change coverage from Jan. 1, 2010, to June 30, 2018, in The New York Times and seven other large-circulation U.S. newspapers: The Wall Street Journal, The Washington Post, The Los Angeles Times, The Chicago Tribune, USA Today, The New York Daily News and The New York Post.
The index jumped during major climate change conferences, such as the one that produced the 2015 Paris Agreement, as well as after major setbacks in efforts to curb global warming, like President Trump’s announcement2017 was the year that the United States decided to withdraw from this agreement.
Professor Ardia spoke out to say that researchers were working on an improved version of the index. “I think it’s safe to say that the index would be spiking now, during the Glasgow conference, whatever happens there,” he said.
The researchers compared their index with the returns of selected stocks, distinguishing between green and brown shares on the basis of their companies’ carbon intensity, as defined by their carbon emissions divided by their revenue. Researchers found that brown stocks had lower prices than green stocks when there was more climate coverage.
Another research paperProfessors Pastor and Taylor used in part the same Media Climate Change Concerns indicator and came up with similar results. It concluded that green stocks performed significantly better than brown stocks between November 2012 and December 2020 due to increased coverage of climate change. “Over this period, the value-weighted portfolio of stocks in the top third of greenness outperformed the bottom third by a cumulative return difference of 174 percent,” the paper said.
This roughly matches the results of standard stock exchange indexes. In recent years, those that focus on environmental factors have had, for the most, higher returns than the broad stock market. For example, the MSCI ACWI ESG Leaders index, which is environmentally friendly, can be found here outperformedAccording to MSCI, the MSCI ACWI standard index (which tracks world market trends) was calculated in 10 years from now through 2020.
But the scholars pointed out that there’s no assurance that this trend will continue, and not simply because past performance doesn’t predict future outcomes, as investors are frequently warned. Their research is based upon measuring the newsworthiness and impact of climate change. If global warming worsens, as most scientists say is likely, it’s possible that people will become inured to it. When a barrage of news on any subject becomes constant, it’s no longer quite as newsworthy, as any journalist knows.
“If it’s a surprise, it’s news, by our definition,” Professor Bluteau said. “Once it’s not surprising, it’s no longer news.” That, in turn, could affect stock returns and reduce the reward that environmentally conscious investors are receiving. Economics can help with such problems. It doesn’t necessarily solve them.