Environmental performance and stock market valuations: global evidence on the pricing of polluters

Climate change and rising pressure to transition to a net zero economy will require firms to adapt, especially those whose business model is heavily dependent on greenhouse gas emissions. This paper analyzes whether differences in environmental performance are reflected in relative stock market valuations. Approximating a firm’s greenness with emission levels and intensities in a global sample of firms from 2006 to 2022, greener firms tend to have higher market valuations given book equity relative to their “brown” peers. A positive association between environmental performance and relative market valuation is found across a wide range of sectors, for most years in the sample, and the majority of regions in terms of global stock market capitalization. Initial evidence suggests that financial markets reward signals regarding firms’ future emission reduction plans, but not those more directly associated with costs.