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PEnvironmental Preferences and Sector Valuations

Author

Listed:
  • Tristan Jourde
  • Arthur Stalla-Bourdillon

Abstract

This paper examines the dynamic nature of pro-environmental preferences through an analysis of sector valuations in global equity markets from 2018 to 2023. We classify companies into three groups based on their business activities: green (e.g., renewables), neutral, and brown (e.g., fossil energy). We then run panel regressions to test whether being in the green or brown sectoral category affects stock valuations. We find that investors value sector affiliation, positively for green and negatively for brown, even after controlling for other firm-level financial and extra-financial characteristics. The effect is sizeable, as we report a 24% overvaluation of companies in green sectors and a 12% undervaluation of companies in brown sectors on average compared to the rest of the market. In addition, companies in green sectors have come under increased investor scrutiny since 2018 and appear increasingly overvalued relative to the rest of the market. These results suggest that, for seemingly non-financial motives, investors have developed a strong preference for stocks in green sectors over time.

Suggested Citation

  • Tristan Jourde & Arthur Stalla-Bourdillon, 2024. "PEnvironmental Preferences and Sector Valuations," Working papers 964, Banque de France.
    • Handle: RePEc:bfr:banfra:964
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    File URL: https://www.banque-france.fr/system/files/2024-09/WP964_0.pdf
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    More about this item

    Keywords

    Environmental Preferences; Green Bubble; Stock Market; Stranded Assets; Valuation Ratios;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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