Does a greater environmental concern mean improved financial performance?

Abstract

This dissertation aims to study the relationship between environmental and financial performance, whether these are linearly correlated or not. It is used a ranking that scores firms from all over the world based on their action towards climate change. From this dataset eight portfolios are formed based on the scores of each firm, using an equally and value-weighted construction approach. The methodology used is based on Carhart (1997) four-factor model and Fama & French (2018) six-factor model. To capture possible environmental related risks, it is incorporated an additional factor to these models, based on the work developed by de Haan, Dam, & Scholtens (2012). The results point out that investors do pay for their preferences for higher sustainable firms and that if a poorer sustainable firm is exposed to a factor that captures environmental related risks it loses its abnormal returns. It is therefore concluded that environmental performance has undoubtedly an effect on financial returns. But this effect is not linear, a firm with higher sustainable concerns does not achieve a better financial performance, neither does a firm with lower sustainable concerns. The high exposure to environmental related risks does not allow top nor bottom sustainable firms to achieve abnormal returns.