This study investigates whether investors respond to Hong Kong companies’ environmental performance by paying either a price premium or a price discount for their equities due to high or low carbon risks in the firms, using regression analysis and expert interviews. This study uncovers the motivation behind the investors’ choice of action. ‘Equities’, ‘shares,’ and ‘stocks’ are used interchangeably in this study.

For the regression analysis, total Scope 1 and Scope 2 greenhouse gas (GHG) emissions (1) per million USD sales, and (2) per million USD cost of goods sold (or total interest expense for the Financials sector), i.e., ‘GHG Intensity’, were the metrics used as proxies for carbon risk. Price premium is measured in terms of the price/sales ratio. Regressions were run over a time se...[ Read more ]

This study investigates whether investors respond to Hong Kong companies’ environmental performance by paying either a price premium or a price discount for their equities due to high or low carbon risks in the firms, using regression analysis and expert interviews. This study uncovers the motivation behind the investors’ choice of action. ‘Equities’, ‘shares,’ and ‘stocks’ are used interchangeably in this study.

For the regression analysis, total Scope 1 and Scope 2 greenhouse gas (GHG) emissions (1) per million USD sales, and (2) per million USD cost of goods sold (or total interest expense for the Financials sector), i.e., ‘GHG Intensity’, were the metrics used as proxies for carbon risk. Price premium is measured in terms of the price/sales ratio. Regressions were run over a time series dataset of 518 companies using 2016-2019 annual GHG Intensity relative to the Mean of the market capitalisation weighted GHG Intensity of these 518 names and lagging semi-annual financial data from June 2017 to June 2021 on (1) all the 518 names, (2) by industry sectors, (3) groups of high versus low GHG-emitters, and (4) quintiles based on GHG Intensity. Regression results suggest that investors are less willing to pay a premium for equities of firms with low carbon risk; yet the investors care about poor performance, and therefore demand a price discount on the stocks of companies that have high carbon risk.

Interviews of select global institutional investors suggest that the majority of them were concerned over the companies’ poor environmental performance which could damage their long-term financial prospects. Return on investments, which is considered as the institutional investors’ first and foremost fiduciary duty, almost always trump environmental performance. Interview results further emphasised that ESG (environment, social and governance) is viewed holistically, and the E pillar is important for sectors where it is material. Respondents also further expected environmental performance to impact corporate financial performance significantly in the long run but it has little effect in the short and the medium term. 88% of the capital represented in the interview panel shows willingness to pay premium for good environmental performance. Over 90% of the represented capital will likely divest or exclude a stock if a firm’s environmental performance is persistently poor. The latter is an important insight into investors’ behaviour towards carbon risk since it indicates investors’ severest action when responding to a company’s carbon risks.

Overall, regression and interviews suggest that investors are more inclined to penalise Hong Kong listed companies that are environmental laggards, instead of rewarding less carbon intensive ones.

JEL Codes : Q54, G11, G23, G32, G41

Keywords: Carbon risk, Climate Change, Behavioural Finance, Investment Decisions, Equity Premium, Institutional Investors