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Climate Change and Firm Valuation:
Evidence from a Quasi-Natural
Philipp Krüger
University of Geneva & Swiss Finance
What is my paper about?
• Mandatory corporate climate change
• Research question: Does the introduction of
mandatory corporate greenhouse gas
emissions disclosure affect firm value?
… and if so, how and why?
Mandatory GHG disclosure regulation
• GHG emissions disclosure regulation is a
“hybrid” type of regulation
– Disclosure regulation
– Environmental regulation
• What does economic theory tell us about the
potential firm-level valuation effects of
disclosure and environmental regulation?
Predictions from economic theory
1. Information economics
a. Asymmetric information hypothesis
2. Environmental economics
a. Traditional view
b. Porter hypothesis
1. Information economics
a. Asymmetric information hypothesis:
Mandatory GHG disclosure reduces
information asymmetries among investors
– reduces adverse selection problem
– uninformed investors become more inclined to
⇒ Net effect on firm value: positive
2. Environmental economics
a. Traditional view: Environmental regulation is
costly to firms
– Firms need to allocate costly production inputs
(e.g., labor or capital) to comply with the
⇒ Net effect on firm value: negative
2. Environmental economics (contd.)
b. Porter hypothesis: Environmental regulation
is not necessarily costly
– Raise corporate awareness for material issues
– Signal about resource inefficiencies and potential
technological improvements
– Trigger innovation (which offset compliance costs)
– Reduce uncertainty that environmentally oriented
investments will be valuable
⇒Net effect on firm value: positive
Conflicting predictions from
economic theory regarding impact
• Information economics suggests positive
• Environmental economics suggests negative
or positive impact
⇒To figure out the impact of the disclosure
regulation on valuation, need to look at data.
Empirical strategy: Examine a recent
regulatory change in the UK
• The Companies Act 2006 - Regulations 2013
mandates publicly listed UK companies to
report their GHG emissions
“[…] in the UK, from the start of next financial year, all
firms listed on the London Stock Exchange will have to
report the levels of greenhouse gases they emit.”
(Former Deputy Prime Minister of the UK Nick Clegg writing
in The Guardian on June 19th, 2012)
Which firms are concerned?
• UK quoted companies
– UK incorporated
– Listed on the Main Market of the London Stock
• Small firms are exempt (assets, sales, and
employees threshold)
What needs to be reported?
• Absolute quantity of emissions in metric tons
of CO2e
• Emission intensity
– A ratio which expresses absolute emissions in
relation to a quantifiable factor associated with
the company’s activities (e.g. sales, assets, etc.)
Where will the information be published?
• Directors’ report:
– A document prepared annually by the directors
under the requirements of UK company law
– Similar to SEC’s Form 10-K
Empirical strategy: Try to emulate a
clinical trial
• Assign firms to
– Treatment: Firms affected by the regulation
– Control: Firms not or less affected by the
• Compare how firm value of the two groups
changes after the regulation
• Main challenge: Finding appropriate control
Two different control groups
• Control group 1 (not-affected): Size and
industry matched firms from other European
– for each UK firm, select most similar non-UK
European firm
• Control group 2 (less-affected): UK based
control group of firms that were already
compliant with the regulation beforehand
Empirical strategy 1
• Treatment: All UK quoted companies
• Control: Size and industry matched firms from
other European countries
• Idea:
– Legislation does not extend to other European
– Compare how average firm value of UK firms and
matched EU firms change after the regulation
Main result
• Firms subject to mandatory reporting (UK,
treatment) increase more in value than
unaffected firms (European, control)
– Implication: Investors value GHG transparency
• Evidence is
– consistent with Porter and Information
Asymmetry view
– inconsistent with Traditional view on
environmental regulation (opposite sign)
Empirical strategy 2
• Separate UK firms into two
homogeneous groups based on exante compliance:
–Treatment group: Firms that did
not report before introduction.
–Control group: Firms that already
reported before introduction.
Empirical strategy 2 (contd.)
• Treatment group: Not-compliant with new
reporting requirements  more strongly
• Control group: quasi-compliant with
requirements  less or not affected
• If firm value of the treatment group
increases more than that of the control group,
corroborating evidence that providing GHG
emissions data affects value positively.
How do I measure ex-ante compliance?
• Use data from CDP (Carbon Disclosure Project)
• Firms mark response to CDP as either ``Public''
or ``Private.''
i. ``Public’’ = available to the general public
ii. ``Private’’ = response available to CDP and the
investors backing CDP
iii. ``NA’’ = did not answer CDP questionnaire
• CDP Response allows to separate UK firms into
non– and quasi—compliant groups.
Result 2
• Firms less compliant with the new reporting
requirements before the introduction (not
reporting to CDP publicly) experience stronger
value increases afterwards
• Confirms that investors value mandatory GHG
emissions disclosure positively
Valuation effects stronger for large firms
1. GHG emissions tend to increase with the
scale of a firm's operations
2. Larger firms more likely to be adversely
affected by climate change because more
assets are exposed
⇒ Evidence suggests stronger effect for large
Does the magnitude of the effect
depend on the industry?
• Strongest effect in carbon intensive sectors
Why does firm value increase?
• Evidence consistent with
– Porter view: increase in efficiency, technological
improvements, etc.
– Information asymmetry view: reduction in
adverse selection
• Is the increase in value due to a Porter or due
to an Information asymmetry effect?
Why does firm value increase? (contd.)
• Porter view implies “real effects” (change in
corporate behavior):
– e.g., higher capital expenditures, research &
development spending; higher return on assets
• Information asymmetry view implies “capital
market effects”:
– e.g., lower Bid-ask spreads, higher trading volume,
Why does firm value increase? (contd.)
• Value increase appear to be due to “capital
market effects”:
– Higher liquidity
– Lower bid-ask spreads
• Value increase not due to “real effects”
– No changes in ROA, R&D, or Capex (maybe there
will be in the longer term, to be seen)
• Evidence more consistent with information
asymmetry view
• Mandatory disclosure with respect to corporrate
GHG emissions is valued positively by investors
– Effect strongest for large firms and firms in climate
sensitive sectors
• Valuation increases appear to be driven by capital
market effects (higher liquidity)
• Important implications for corporate climate
change disclosure regulation in other jurisdictions
(e.g., United States)
Thank you for
your attention!