Environmental spirits: Climate concerns and IPOs in the US

Abstract

This thesis seeks evidence of a climate-related premium in the underpricing and long-term performance of “brown” and “clean” IPOs, consistent with the premium documented for high-emission stocks in recent literature. We also investigate if the potential premium is conditional on the level of climate concerns.

We find that during times of heightened climate concerns, IPOs with a brown environmental profile are more underpriced compared to clean offerings. It seems that when climate concerns increase, brown companies must leave more money on the table to successfully go public. Furthermore, our subperiod analysis reveals a distinct rise in underpricing for brown IPOs compared to clean IPOs from 2010-2015 to 2016-2022.

In contrast, our long-term performance results show superior relative performance for clean IPOs, contradicting the high-emission premium. In addition, we are unable to attribute this clean outperformance to unexpected climate shocks, as proposed by Pastor, Stambaugh and Taylor (2022), leaving our long-term results mixed with past literature.

Notably, however, we find some evidence of brown long-term performance improving in the latter part of our sample. We argue this improvement, together with the strengthening brown underpricing over our sample period, reflects a general increase in the required compensation for holding brown assets as investors become more concerned about environmental issues.