When Bad News About the Climate Is Good for Green Stocks

How effective it is is not yet clear. United Nations conference continues in Glasgow will mitigate the most harmful effects of global warming. But one conclusion is already clear: The number of news articles on climate change is increasing.

Another outcome of the Glasgow conference can be predicted with some confidence. So-called green stocks of companies with relatively low carbon emissions will receive a temporary increase. At the same time, brown stocks – those of companies that emit large amounts of greenhouse gases – will face a headwind.

New research shows that the two effects are related. Three recent research papers from two groups of economists suggest that as public exposure to information about climate change increases, investor preferences change as well, changing the performance of stock market sectors.

“What we found is a story about climate change and the stock market” Priest of LubosA finance professor at the Chicago Booth School of Business said in an interview.

“At this point, news about climate change, any news is negative, at least to some degree,” he said, which means it tends to raise public concern about the future of the planet. “As investors become more aware of the climate issue, they realize that regulation is coming and it will benefit green firms and detrimental to brown firms.”

The growing public interest and the accompanying preference for eco-friendly stocks by many investors are driving those stocks up in price and hurting companies that emit major carbon dioxide, methane and other greenhouse gases, scientists say. They also pointed out that this investor preference for green companies makes it easier and cheaper to raise money for environmentally beneficial projects.

But for those who want to do good while doing good, the researchers’ findings may not be entirely comforting.

For one thing, the fact that many investors prefer green stocks that create a measurable green premium or “greenium” that raises share prices means these stocks will have lower expected returns in the future. In financial markets, this is what happens when demand for an asset rises and supply does not: Its price rises in the short run, but all other things being equal, it has less room for increases further down the road. .

“With this green preference, we can say that the market has reached a new equilibrium,” he said. Robert F Stambaughis 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. Frankly, fossil fuel stocks could still rise sharply in the midst of an energy shortage – as they are even with increasing investor preference for alternative energy companies and other green stocks. By creating a premium for green stocks and avoiding brown stocks, eco-conscious investors can unintentionally increase expected returns for brown stocks, Professor Stambaugh said. As long as these companies continue to generate profits and cash flows, investors who strongly emphasize making money on environmental issues can now flock to brown stocks and treat them as a relative bargain.

The essence of these insights is revealed in the chapter “Sustainable Investment in Balance”. published Available this month in the Journal of Financial Economics and as follows: worksheet Since December 2019. Lucian TaylorProfessors Stambaugh and Pastor, who are also professors at Wharton, wrote this paper developing the model that explains how changing investor preferences lead to stock repricing and stock market changes.

The next two articles provided evidence to support their theory.

First, “Climate Change Concerns and the Performance of Brown Stocks Against Green Stocks” Written by a group of economists affiliated with the Belgian National Bank. Them David Ardia of HEC Montreal, Keven Bluteau of the Université de Sherbrooke and Kris Boudt and Koen Inghelbrecht from Ghent University.

They created a “Media Climate Change Concerns index” that measures the frequency and tone of climate change coverage from January 1, 2010 to June 30, 2018 in The New York Times and seven other major US newspapers: 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 rose during major conferences on climate change. 2015 Paris Agreementand after major failures in efforts to curb global warming, as President Trump did announcement In 2017, the United States withdrew from this agreement.

In an interview, Professor Ardia said that researchers are working on an updated version of the index. “During the Glasgow conference, it’s safe to say that the index is now going up fast, no matter what’s going on there,” he said.

By comparing their indexes with the returns of selected stocks, the researchers distinguished between green and brown stocks on the basis of carbon intensity, defined as their company’s carbon emissions divided by their revenue. The researchers found that when climate coverage increased, the prices of brown stocks fell compared to green stocks.

another research paper Pastor, Stambaugh and Taylor by professors relied in part on the same Media Climate Change Concerns index and produced similar findings. It concluded that increased climate change coverage contributed to the significantly better performance of green stocks than brown stocks from November 2012 to December 2020. A cumulative return difference of 174 percent,” the paper said.

This roughly coincides with the results of standard stock market indices. Those emphasizing environmental factors have, for the most part, enjoyed stronger returns from the broader market in recent years. For example, the eco-friendly MSCI ACWI ESG Leaders index performed better According to MSCI, the standard MSCI ACWI index (tracks world markets) in 10 of the 13 years until 2020.

But it’s not because there’s no assurance that this trend will continue, and past performance doesn’t predict future results, as investors are often warned. Their research is based on measuring the newsworthiness of climate change. As most scientists say, if global warming gets worse, it’s possible that people will get used to it. Once the torrent of news on any topic becomes steady, it is no longer newsworthy, as any journalist knows.

“A surprise is news by our definition,” said Professor Bluteau. “Once it’s not surprising, it’s not news anymore.” This, in turn, can affect stock returns and reduce the reward for environmentally conscious investors. Economics explains such problems. It doesn’t necessarily solve them.