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A study done by the University of Sussex Business school compared stock performance of firms in the S&P 500 between 2005 and 2018 with emissions below industry average and their polluting counterparts. The study found that environmentally conscious firms offer seven percent better returns along with 30 percent less risk.
Environmental companies were found to be the best performers in industry-specific portfolios with the biggest returns being found in consumer discretionary, energy, financial and health care portfolios.
Environmentally sensitive industries such as the energy sector companies benefited the most from reducing greenhouse gas emissions.
The study also found that an energy firm that decreased pollution output by 10 percent there would be a correlated three percent boost in share price.
Whilst other firms in consumer staple industries such as real estate didn’t see any increase in share price when decreasing their emissions.
The study was performed by Dr Panagiotis Tzouvanas and Professor Emmanouil Mamatzakis of University of Sussex and Birkbeck, University of London.
The study found that in 2005 a $100 investment into a green company would get $45 more in their return in 2018 than investments in polluting rival companies.
Companies considered as environmental firms needed to be 10 percent below average for greenhouse gas emissions.
This breakthrough research is the very first to examine the environmental performance of a company and their risk-adjusted returns.
The authors say this study suggests environmentally-minded investments will improve the financial markets’ efficiency and justifies more investors moving to select environmental stocks.
This research also further proves that the number of policies aiming lower greenhouse gas emissions should increase, not just to help the environment but improve market performance on a global scale.
Dr Tzouvanas, Lecturer in Finance at the University of Sussex Business School, said: “Our study shows that it pays to invest in environmental stock and that it is justified from a portfolio selection point of view.
“The research also indicates, to a certain extent, that it is profitable for a firm to invest in clean technologies.
“Our findings show that stocks with superior environmental performance have higher equity valuation and benefit from lower associated risks and particularly lower idiosyncratic risk.
“We have found strong evidence that portfolio selection of firms with strong environmental performance is justified both in terms of market returns and risks.
“There is one note of caution for investors from our findings on the relationship between the stocks of environmentally and systematic risk but there are good reasons for this link in terms of the challenges of adapting to cleantech.”
The authors did also note that adapting to cleantech can bring higher overall costs due to compliance and increasing competition.
Emmanouil Mamatzakis, Professor of Finance at Birkbeck, University of London, said: “Our findings reveal that the stocks of companies with strong environmental performance are value for money in the portfolio, while also contributing to the sustainability of the economy.
“Our findings justify the use of policy and regulation interventions that encourage and incentivise environmentally-responsible ’green’ investment.
“Our study also found that environmental performance has a very strong negative association with total and idiosyncratic risk.
“From an investor’s perspective this very important because it implies that higher diversification can be achieved by including environmental stocks in an investment portfolio.”
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