Negative Impact Correlates with Lower Market Valuation, Study Shows

    Stockholm (NordSIP) – Harvard Business School (HBS) along with the Global Steering Group for Impact Investment (GSG) and the Impact Management Project (IMP) are working actively on a set of Impact Weighted Accounts, a project which aims to measure and disclose companies’ positive or negative outcomes for people and the planet.

    In a recent paper, HBS Professor George Serafeim who leads the initiative demonstrates, together with co-authors David Freiberg, DG Park and Robert Zochowski, that environmental impact is associated with lower corporate market valuation, lower stock returns, and higher risk, consistent with environmental impacts being a financially material signal across many industries.

    “Our environment is way too important not to have robust measures of impact that are widely available. At the Impact Weighted Accounts of Harvard Business School along with The Global Steering Group for Impact Investment (GSG) and the Impact Management Project we are making this a reality,” Serafeim comments on LinkedIn.

    The aim of the Impact-weighted Accounts is to introduce “line items on a financial statement, such as an income statement or a balance sheet, which are added to supplement the statement of financial health and performance by reflecting a company’s positive and negative impacts on employees, customers, the environment and the broader society.”

    In doing so, the HBS team has developed a methodology to derive monetized environmental impact estimates in a comparable way across companies by applying characterization pathways and monetization factors to organization level environmental outputs, including carbon emissions, water use, and other emission types.

    The data used in the working paper to calculate environmental intensity includes approximately 13,000 firm-years and sources include Bloomberg, Thomson Reuters, Exiobase, the Environmental Priority Strategies (EPS) database, the Availability WAter REmaining (AWARE) model, Waterfund’s Global Water Price and Worldscope.

    The study finds that the median environmental impact as a percentage of an organization’s sales and operating income is close to 2% and 20% respectively and, in 11 out of 67 industries, it exceeds 10% of sales and 100% of operating income. These measurements suggest a significant level of ‘hidden liabilities’ and potential for value erosion if environmental impacts are priced, the authors conclude.

    The paper also seeks to understand the relationship between the calculated environmental intensity and data from rating providers MSCI, RobecoSAM, and Sustainalytics, and finds that the study’s data exhibits negative, yet moderate correlation to the ratings provided by these three firms.

    The report also finds a negative correlation of environmental intensity with both Tobin’s Q (the ratio of a firms’ physical assets market value and their replacement value) and price to book equity valuation for the full universe of companies examined. Finally, the authors also show a statistically significant, negative correlation of environmental intensity with the Sharpe ratio and its components, suggesting that the environmental intensity measure provides a meaningful signal of financial risk and return.

    Image © Twenty20

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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