The Relationship between Environmental Performance of Firms and Stock Returns: An Analysis in the Energy Sector

Today, with climate change, firms' reports, environmental disclosures and environmental performances that demonstrate their sensitivity to the environment have begun to be accepted by stakeholders. It is assumed that firms increase their corporate reputation by developing environmental awareness and accordingly, stakeholders have a positive opinion about the firm. When stakeholders have a more positive corporate image of the firm, share prices and firm value can increase. Moreover, environmentally friendly activities of firms can save costs and improve their financial performance. In this context, the role of non-financial activities such as firms' environmental performance on firms' stock returns is discussed in the literature. The study investigates whether the environmental awareness shown by firms in the energy sector in developed and developing country groups is reflected in stock returns. In this study, we examine the causality relationship between firms' activities to prevent environmental pollution and environmental damage and their stock returns. In other words, we ask whether the environmental performance of firms has an impact on investors' investment decisions and whether investors take firms' environmental performance into account when determining stock prices. In line with the objective of the study, the causality relationship between the environmental performance and stock returns of 63 firms operating in the energy sector in developed and developing countries for the period 2009-2020 is analyzed. According to the findings of the study, firms' environmental performance has a statistically significant effect on forecasting. According to the results of Dumitrescu and Hurlin (2012) panel causality test, there is a bidirectional causality relationship between the environmental performance of firms in the energy sector in developed and developing countries and their stock returns. According to the findings of the study, firms' environmental performance has a statistically significant effect on the estimation of stock returns. The finding that there is a bidirectional causal relationship between firms' environmental performance and stock returns suggests that environmental performance can be used as a guiding factor for investors, managers and shareholders in predicting stock returns.