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A new research piece Are Carbon Emissions Associated with Stock Returns? by Jitendra Aswani, Aneesh Raghunandan, and Shiva Rajgopal has been published. It was edited by Alex Edmans, a leader in the recent emphasis in applying academic rigor and professional skepticism to ESG and sustainability. I don’t typically cover academic studies, but this one is important and can be used to help check confirmation bias in ESG/climate staff. The paper evaluates previous claims that reduced carbon emissions increase stock prices.

The basic takeaways from the paper are:

  • Commercial ESG data providers like CDP, Trucost, MSCI, Sustainalytics, and Refinitiv use a combination of emissions data reported by companies and their own proprietary estimation methods. Where actual emissions data for a company is available, vendors are consistent in reporting that (a correlation of around 0.97). But with vendors’ own emissions estimates, the data is less consistent – “rais[ing] concerns about the validity of proprietary estimation methods used.” The research suggests “that the link between emissions and returns primarily reflects vendors’ estimation procedures.” 
  • Total emissions values from companies aren’t inherently meaningful – they are just a “measure of firm output. Because emissions arise from a firm’s core operations, in the short term, unscaled emissions are likely to be highly correlated with the quantity of goods produced or sold” – which stock prices already reflect. The authors argue that “emissions intensity – empirically measured as the ratio of emissions to sales – is a more appropriate measure of carbon performance.” 

How can you make practical use of this?

  • First, ask commercial data providers and raters to review information they have on your company to ensure it is accurate. Don’t assume that vendors accurately reflect public reports or regulatory data/disclosures. Data providers may not provide you with information about their proprietary emissions estimation methods, but you might be able to help them with assumptions, emissions factors and other aspects to improve the accuracy of their methodology.
  • Second, if you aren’t already using emission intensity metrics, it might be worth considering. Not only is that aligned with some of the disclosure frameworks, it might give you a better way to track how (or if) stock performance can indeed be tied to emissions.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile