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Measuring Firm Environmental Performance to Inform ESG Investing

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  • Nicholas Z. Muller

Abstract

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.

Suggested Citation

  • Nicholas Z. Muller, 2021. "Measuring Firm Environmental Performance to Inform ESG Investing," NBER Working Papers 29454, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29454
    Note: AP CF EEE
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    Cited by:

    1. Jiangyuan Hou & Yanping Wang & Mingyue Du, 2023. "Friend or Foe: How Do Consumers and Producers Affect the ESG Rating Index? Evidence from China’s Market of Organic Milk," Sustainability, MDPI, vol. 15(14), pages 1-17, July.
    2. Davidson Heath & Daniele Macciocchi & Roni Michaely & Matthew C. Ringgenberg, 2023. "Does Socially Responsible Investing Change Firm Behavior?," Review of Finance, European Finance Association, vol. 27(6), pages 2057-2083.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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