Innovest Strategic Value Advisors

Does Improving a Firm`s Environmental Management System and Environmental Performance Result in a Higher Stock Price?

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Courtesy of Innovest Strategic Value Advisors

METHODOLOGY: Betas for stocks were estimated for two periods, 1980-1987 and 1988-1994, the first being “before” corporate environmental management and the second, “after”. Two environmental variables were determined: 1) environmental management - each company was rated on a 1 to 35 scale for environmental management and philosophy; 2) environmental performance defined as the average annual change in Toxic Release Inventory releases per unit of firm capital. The study sought to determine whether these items had any affect on increasing risk as defined by Beta.

RESULTS: The regression model (which was designed to correct for industry, financial leverage, and other factors) was statistically significant (R2 = 28%, F-statistic - 6.73). A 50% improvement in environmental management would lead to an 8.5% reduction in a firm’s Beta; a 50% improvement in environmental performance would lead to a 6.5% reduction in Beta; a combination of the two would lead to a 13.2% reduction in Beta (assuming improvements in environmental performance occur in year 2).

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