It is not yet clear to what extent the current United Nations conference in Glasgow will be effective in mitigating the most pernicious effects of global warming. But one result is already evident: the number of press articles on climate change is increasing.
Another outcome of the Glasgow conference can also be predicted with some confidence. So-called green stocks – those of companies with relatively low carbon emissions – will get a temporary boost. At the same time, brown stocks, those of companies emitting large amounts of greenhouse gases, will face a headwind.
New research indicates that the two effects are related. Three recent research papers by two groups of economists suggest that as public exposure to information on climate change increases, investor preferences also change, thereby altering the performance of sectors of the stock market.
“What we found is a story about climate change and the stock market,” said Lubos Pastor, professor of finance at the Booth School of Business at the University of Chicago, in an interview.
“At this point, the brand new climate change news is, at least to some extent, negative,” he said, meaning that it tends to cause public concern. to the future of the planet. “As investors become more aware of the climate issue, they understand that regulations are coming and that the situation will be good for green businesses and bad for brunettes. “
This heightened public attention – and the concomitant preference of many investors for environmentally sensitive stocks – raises the price of such stocks and hurts those of companies that are large emitters of carbon dioxide, methane and gas. other greenhouse gases, the researchers found. They also pointed out that this investor preference for green businesses has made it easier and cheaper to raise funds for projects that benefit the environment.
But for people who want to do well while doing good, the researchers’ findings may not be entirely comforting.
On the one hand, the very preference of many investors for green stocks – which creates a measurable green premium, or “greenium,” which raises their stock price – implies that these stocks will have lower expected returns in the future. This is exactly what happens in financial markets when the demand for an asset soars and the supply does not rise: its price increases in the short term but, all other things being equal, it has less margin. increase on the road. .
“We would say that with this green preference, the market strikes a new equilibrium,” said Robert F. Stambaugh, an economist at the Wharton School at the University of Pennsylvania. “By pricing green stocks higher, investors are accepting lower expected returns whether they understand it or not.”
The reverse is also true. Clearly, fossil fuel stocks may still rise sharply against a backdrop of energy scarcity – as they have in recent months – even though there is a growing investor preference for alternative energy companies. and other green actions. On the contrary, Professor Stambaugh said, by creating a premium for green stocks and avoiding brown stocks, environmentally conscious investors could inadvertently increase the expected returns of brown stocks. As long as these companies are still producing profits and cash flow, investors who place a heavy emphasis on money rather than environmental issues can now flock to brown stocks, deeming them a good deal.
The core of these ideas appears in “Sustainable Investing in Equilibrium,” published this month in the Journal of Financial Economics and available as a working paper since December 2019. With Lucian Taylor, who is also a professor at Wharton, the professors Stambaugh and Pastor wrote this article, which developed the model that explains how changing investor preferences lead to stock revaluations and changes in stock markets.
Two subsequent papers provided evidence to support their theory.
The first, “Climate Change Concerns and the Performance of Green versus Brown Stocks”, was written by a group of economists affiliated with the National Bank of Belgium. They are David Ardia from HEC Montréal, Keven Bluteau from the University of Sherbrooke and Kris Boudt and Koen Inghelbrecht of the University of Ghent.
They constructed an “Index of Climate Change Concerns in the Media” which measured the frequency and tone of coverage of climate change from January 1, 2010 to June 30, 2018 in the New York Times and seven other major US newspapers. print: The Wall Street. Journal, The Washington Post, The Los Angeles Times, The Chicago Tribune, USA Today, The New York Daily News and The New York Post.
The index has risen during major climate change conferences, such as the one that produced the 2015 Paris Agreement, as well as after major setbacks in efforts to curb global warming, as President Trump’s announcement in 2017 that the United States withdrew from this agreement.
In an interview, Professor Ardia said researchers are working on an updated version of the index. “I think it’s safe to say that the index would go up now, during the Glasgow conference, whatever happens there,” he said.
The researchers compared their index to the returns of selected stocks, distinguishing between green and brown stocks on the basis of their companies’ carbon intensity, as defined by their carbon emissions divided by their earnings. The researchers found that as climate coverage increased, the prices of brown stocks fell relative to those of green stocks.
Another research paper by Professors Pastor, Stambaugh, and Taylor relied in part on the same Media Climate Change Concerns index and produced similar results. He concluded that the increased coverage of climate change contributed to a significant outperformance of green stocks over brown stocks from November 2012 to December 2020. a cumulative return difference of 174 percent, “the newspaper said.
This roughly matches the results of standard stock indexes. Those that focus on environmental factors have, for the most part, achieved higher returns than the broader market in recent years. For example, the MSCI ACWI ESG Leaders Ecological Index has outperformed the standard MSCI ACWI Index (which tracks global markets) in 10 of the 13 years through 2020, according to MSCI.
But the researchers stressed that there is no guarantee that this trend will continue, and not simply because past performance does not predict future results, as investors are frequently warned. Their research is based on measuring the news of climate change. If global warming gets worse, as most scientists say, people may get used to it. When a barrage of information on any topic becomes constant, it isn’t as newsworthy as any journalist knows.
“If it’s a surprise, it’s news, by our definition,” said Professor Bluteau. “Once it’s not surprising, it’s not news anymore. This, in turn, could affect stock returns and reduce the reward that environmentally conscious investors receive. Economics explains problems like this. It doesn’t necessarily solve them.
