Measuring Firm Environmental Performance to Inform ESG Investing
Investing according to environmental, social, and governance criteria is gaining momentum. Most environmental performance indices focus only on the tonnage of carbon dioxide (CO2) emissions. This paper proposes a new monetary index covering eight pollutants. Inclusion of multiple pollutants reflects a broader range of risks. In the U.S. utility sector from 2014 to 2017, indices which only track CO2 mischaracterize firms’ environmental performance and underestimate its effect on financial outcomes relative to the multipollutant index. Analysts’ earnings forecasts for dirtier firms systematically undershoot actuals. The multipollutant index suggests new financial management strategies relative to those based on carbon intensity.
The author thanks two alumni of the Tepper School of Business at Carnegie Mellon University for generously supporting this work and providing insightful feedback along the way. Excellent research assistance provided by Sachin Srivastava and Lavender Yang was central to this work. All remaining errors are the responsibility of the author. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
- Author(s): Nicholas Z. MullerWhile investor attention often focuses on carbon emissions, local pollutants are also important components of many firms’...