Environmental Firm Impact, profitability and stock crashes

Firm's environmental impact has been at the center of the debates of policymakers, consumers, non-profit organization and central banks over the last five years after the 2015 Paris agreement. While many countries, also pushed by a growing concern and pressure of their local population, agreed on reducing the enviromental impact of their industries it is still not clear how such agreements will be indeed respected and how policies will be enforced in each country. In this regard, in order to guarantee a successful implementation of the proposals it appears of fundamental importance that the signed agreements and the proposed policies have the highest consensus among firms and consumers. This project aims to study what are the effects on firm's profitability and catastrophic risk of being less environmently "costly". We measure the environmental impact of firms by using data from the Impact-Weighted Accounts Project website of Harvard Business School (Freiberg, Park, Serafeim and Zochowski (2021)). The dataset contains the environmental cost of 2,585 firms around the world from 2010 to 2019. The Environemntal costs dataset is combined with accounting and financial data obtained from Bloomberg, EIKON, COMPUSTAT and CRSP. Our preliminary evidence restricted to the US sample, indicates that firms with lower environmental impact have higher profitability (higher return on assets and return on equity), produce better stock return performances and have a lower likelihood of experiencing stock price crashes of -20% or lower.

Firm's environmental impact has been at the center of the debates of policymakers, consumers, non-profit organization and central banks over the last five years after the 2015 Paris agreement. While many countries, also pushed by a growing concern and pressure of their local population, agreed on reducing the enviromental impact of their industries it is still not clear how such agreements will be indeed respected and how policies will be enforced in each country. In this regard, in order to guarantee a successful implementation of the proposals it appears of fundamental importance that the signed agreements and the proposed policies have the highest consensus among firms and consumers. This project aims to study what are the effects on firm's profitability and catastrophic risk of being less environmently "costly". We measure the environmental impact of firms by using data from the Impact-Weighted Accounts Project website of Harvard Business School (Freiberg, Park, Serafeim and Zochowski (2021)). The dataset contains the environmental cost of 2,585 firms around the world from 2010 to 2019. The Environemntal costs dataset is combined with accounting and financial data obtained from Bloomberg, EIKON, COMPUSTAT and CRSP. Our preliminary evidence restricted to the US sample, indicates that firms with lower environmental impact have higher profitability (higher return on assets and return on equity), produce better stock return performances and have a lower likelihood of experiencing stock price crashes of -20% or lower.