Forward-looking & market-based greenness measures of firms.
We propose a new measure based on the stock market's perception of firms' greenness, resulting in a forward-looking metric informed by the wisdom of the crowd of market participants.
Our measure covers a broader set of firms than other measures.
Our measure incorporates information about the future, compared to, e.g., carbon emissions.
Our measure captures both direct and indirect risks in a firm’s value chain associated with the transition to a green economy.
Our measure is less prone to green-washing, to the extent that market participants can distinguish it from honest attempts to shift the firm’s climate impact.
Our market-based greenness measure covers a much broader set of firms than other measures. This is particularly true outside of Europe and the US.
Our market-based greenness measure plausibly differentiates industries, with firms of green sectors obtaining higher scores than firms of brown sectors
Our market-based greenness measure correlates negatively with firms' carbon emissions. The relationship is more significant for future carbon emissions, suggesting that our measure is indeed forward-looking.
This paper proposes a simple but effective tool to measure firms’ exposure to climate risk: the market. We first develop a model showing that abnormal stock returns around significant climate policy events measure a firm’s exposure to climate risk. On this basis, we create market-based firm greenness measures for around 36,000 international firms based on abnormal returns around UN climate conferences. The resulting measure creates intuitive rankings of sector-level climate-risk exposure and is correlated with, but distinct from existing measures. At the firm level, market-based greenness is associated with lower present and future carbon emissions. Green firms are more likely to file green patents, have lower stock-price volatility, and tend to be financially more robust. At the country level, market-based greenness is associated with lower emission intensity and a larger share of renewable energy.