Climate Change and Corporate Profitability: The Effects of Greenhouse Gasses and Sustainability Strategies on Stock Price Performance

Abstract

This paper tests the hypothesis of whether or not a statistically significant relationship exists between a company’s direct and indirect greenhouse gas (“GHG”) emissions and equity return performance. Approximately 750 international companies, with 6 years of available and complete emissions data, were analyzed with multilinear regression (“MLR”) analysis. MLR was also used on sub-sample population data sets categorizing the sample data into smaller industry-level groups. In an effort to increase the model’s fit and explain more variance, included and regressed were new independent variables representative of total GHG output and GHG emission changes, both in totality and annually, qualitative variables relating to corporate managerial practices (the hierarchical level of corporate initiatives and the potential effect of environmental performance incentives), the corporate use of emissions trading schemes in the selected industries, and GHG intensity ratios calculated by dividing Scope 1 and Scope 2 emissions by net income, market capitalization, and revenue. Key findings are: 1) 6 year Scope 1 and Scope 2 emissions negatively affect total 6 year stock price return (F(2,734) = 11.660, ***p < 0.001), 2) Scope 1 returns are a statistically significant predictor (***p < 0.001, B = -0.047, β = -0.182) of 6 year stock price performance, 3) stock price performance is negatively correlated to GHG emissions (Scope 1 R = -0.175**, Scope 2 R = -0.118**), 4) in certain industries sustainability matters more than in others, 5) in different industries different predictor variables have statistical significance, and 6) companies that do not emit as much GHG’s as others generally fare better in the stock market. Current sustainability trends, reasoning for those trends, and the Paris Agreement are all discussed in brief and then the results of the statistical analysis described previously is reviewed in detail. This paper concludes (and is empirically evidenced by statistical analysis) corporate sustainability strategies preserve shareholder wealth.