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The Dartmouth
June 23, 2024 | Latest Issue
The Dartmouth

Green firms see drop in market value

While an increasing number of companies are voluntarily lowering greenhouse gas emissions in an effort to "go green," new research suggests that doing so could lower market value and overall financial performance, according to Karin Thorburn, a business administration professor at the Tuck School of Business. Thorburn, who conducted her research with environmental studies professor Karen Fisher-Vanden, said that her findings led her to advocate a more forceful role for the federal government in regulating carbon emissions.

Thorburn's research focused on companies participating in voluntary environmental initiatives such as Climate Leaders, an Environmental Protection Agency program linking the government and industries to address climate change strategy, and Ceres, a national network aiming to address sustainability challenges.

Thorburn examined companies involved with Climate Leaders or Ceres and tracked their stock values before and after they announced new environmental goals.

Shareholders reacted pessimistically to companies' announcements to join Climate Leaders, Thorburn found. The 46 sample firms lost a cumulative $16 billion in market capitalization after joining the program, representing 0.9 percent of their market value, she said. These immediate reactions in stock value only constitute short-term effects, but Thorburn said this could be indicative of future trends.

"In general, when the stock market looks at a company, it values both the short-term and future expected profits," Thorburn said. "For example, you will notice that small growth companies sometimes start at high share values -- this is all about future expected capital."

No significant change was found in the value of members of Ceres, which, according to Thorburn, is a non-specific program that does not require as much of a commitment.

Thorburn determined that shareholders reacted negatively to companies' voluntary environmental initiatives based on the increased costs and investments that going green would entail. These negative considerations outweighed the positive incentives -- such as saving money in the future, reducing energy costs and spreading support of sustainability causes -- and drove stock prices down, she said.

"Shareholders deducted investments from the expected revenues and saw a negative impact on the value of the corporation," she said.

Thorburn did find that the immediate share values of companies in carbon-intensive industries were less affected than other companies when they announced participation in voluntary environmental initiatives. She attributed this trend in shareholder reaction to the anticipation of possible government regulatory action.

The Untied States relies too heavily on voluntary environmental initiatives, Thorburn said. Governments in other parts of the world, such as Western Europe and Russia, take a stronger role in regulating greenhouse gas emissions than in America, she said. The United States, unlike these other governments, has not signed the Kyoto Protocol, an international agreement setting greenhouse gas emission standards.

The United States declined participation in the Protocol because, according to the Bush administration, the treaty would adversely affect the economy, would ultimately do little to reduce greenhouse gas emissions and is inequitable because developing countries are not held to the same limits as the other participants, as reported by The Washington Post. The Bush administration also criticized the likelihood that many countries would buy credits from other participants, the Post reported.

"I think it's very irresponsible of our government to trust the market to lower greenhouse gases," Thorburn said, but she expressed hope that the administration of President-elect Barack Obama will adopt a more stringent attitude towards regulating carbon emissions.

The debate about whether these initiatives improve financial performance is still a heated one, and the new findings initially surprised Thorburn.

"First we thought that the stock market would like these investments, since we hear so much about green goodwill," Thorburn said.

At second glance, Thorburn said the results made more sense. Currently, Climate Leaders has slightly more than 200 partners, roughly 2 percent of American firms. If these voluntary environmental initiatives led to financial success, programs like Climate Leaders would have many more members.

Companies participating in Climate Leaders each have to establish a percentage reduction of green house gas emissions and a deadline. Major corporation members such as IBM, General Electric and Pfizer have already outlined their plans -- which include reducing total emissions by 7 percent, 1 percent and 20 percent by 2012, respectively -- while more than 100 firms' goals are in development.

The average goal of Thorburn's sample companies was a 17 percent decrease of emissions, and research pointed to a greater drop in share value with increased percentages of emission reduction, Thorburn said.

Thorburn and Fisher-Vanden will present their complete findings in a paper awaiting journal publication, according to Thorburn.