An Empirical Investigation of Decarbonization and Stock Returns

The authors of the paper “Is Being Green Rewarded in the Market? An Empirical Investigation of Decarbonization and Stock Returns” utilize several empirical methodologies to examine the relationship between decarbonization efforts and stock market returns. The study employs a unique methodology to measure decarbonization efforts using revenue adjusted GHG emissions at the firm level through three strands including regression analysis, event studies, and portfolio analysis. These approaches to empirical research provide a novel and comprehensive measure of decarbonization which is not limited to carbon emissions data in order to explore the link between being green and financial returns. The study uses a cross-sectional regression model to assess the effect of decarbonization on long-term stock returns and to analyze the content of corporate sustainability reports looking at the behavior of firms in different carbon intensity quintiles. Moreover, the methodologies including regression analysis and event studies investigate whether firms’ environmental initiatives lead to higher stock price returns or are due to other influences such as firm size, sector of the market, or geographic region.

First, the approach event studies are used in the present study to examine the market’s reaction to the new decarbonization policies. Second, regression analysis is used to control for other factors that could potentially drive the relationship between stock returns and decarbonization over a longer period of time. Last, portfolio analysis is being used to investigate the relationship between stock returns and decarbonization while taking opposite firms into consideration, decarbonized and no-decarbonized. Then, the researchers compare the average returns of portfolios over the same period of time to draw conclusions about the impact of decarbonization on stock returns. These empirical methodologies to research help the authors to gain a more comprehensive understanding of their research topic, and thus offer valuable insights into the relationship between decarbonization and stock returns in a descriptive and correlational manner. The paper through the empirical research methodologies thus finds that there is a positive relationship between carbon intensity and stock returns, after controlling for various firm characteristics which suggest that being green is rewarded in the market.