Relationship between companies GHG emission and financial performance: Evidence from Europe

Abstract

This thesis studies whether there is a relationship between firm financial performance and its scope 1 and 2 emission levels and whether the materiality of the issue influences this relationship. This study is carried out in a European context for the years 2007-2018. Materiality is defined based on the SASB Materiality Map, which states that material issues are those that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.

GHG emissions have an increasingly significant impact on the business environment and operations due to stakeholder concerns as well as the changing regulatory landscape. However, prior studies have not produced a consensus on the relation between GHG emissions’ and financial performance nor taken materiality into consideration when studying this relationship.

The findings of this thesis indicated that there is a statistically significant negative relationship between scope 1 emission intensity and financial performance both in the short and long-term, regardless of the materiality. However, the analysis found a positive relationship between scope 2 emission intensity and financial performance for firms to which GHG emissions are not material and vice versa negative relationship for firms to which they are when performance measured as Tobin’s Qs. Nonetheless, the economic significance of scope 2 emissions is found to be smaller than that of scope 1 emissions and emissions impact to be greater on market-based long-term financial performance as measured by Tobin’s Q.

The findings imply that companies that have low scope 1 emission intensity can generate more profit and have higher market value. In addition, when GHG emissions are defined as being material, attention should also be paid to scope 2, since capital markets seem to value higher firms that have smaller scope 2 emission rates. The same was not found for firms to whom GHG emission are not material.