The drivers of the relationship between corporate environmental performance and stock market returns

Marien de Haan, Lammertjan Dam, Bert Scholtens*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

20 Citations (Scopus)

Abstract

Is there a relationship between corporate environmental performance (CEP) and stock returns? And if so, what drives this relationship: changes in corporate risk exposure or mispricing because of investors' taste for high CEP stocks, based on personal values or social norms? To answer these questions, we use a new and comprehensive ranking that measures the environmental performance of the 500 largest publicly traded US corporations. Our methodology is based on the Fama–French–Carhart four-factor asset-pricing model. In addition, we incorporate a fifth factor to capture common CEP-related risks. The results point to a negative relationship between CEP and stock returns, partially driven by common CEP-related risks. At the same time though, the influence of taste cannot be ruled out.

Original languageEnglish
Pages (from-to)338-375
Number of pages38
JournalJournal of Sustainable Finance and Investment
Volume2
Issue number3-4
DOIs
Publication statusPublished - 1 Oct 2012

Keywords

  • corporate environmental performance
  • multifactor model
  • ranking
  • risk
  • stock performance
  • sustainability
  • taste

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