Published October 25, 2014
Environmental information disclosure and environmental transparency programs seem virtually ubiquitous in the business world. Consumers, employees, investors, activists, regulators, and the general public regularly encounter product-level hazard warnings, read eco-labels, hear about firms’ carbon emissions, and listen to the media debate the latest NGO-sponsored green company rankings. The programs that produce this environmental information may be inexpensive, politically expedient, far-reaching, and especially flexible ways to influence environmental outcomes in a constrained and complicated world. But do environmental transparency programs work? Do they achieve program goals? Do they affect firms’ bottom lines enough to motivate change? If so, how do environmental information programs actually work? What are the mechanisms?
One key result is that highly-rated firms had market returns that were 0.6 to 1.0 percent higher than the returns of firms rated poorly.
In “Environmental Disclosure: Evidence from Newsweek’s Green Companies Rankings,” we take up these issues for a high profile context affecting the 500 largest firms in the U.S. We explore the impact of Newsweek magazine’s carefully researched environmental performance rankings on stock market returns. One key result is that highly-rated firms had market returns that were 0.6 to 1.0 percent higher than the returns of firms rated poorly. By the end of the week the ratings came out, the average firm ranked in the Top 100 gained $100 million in market value relative to the average firm outside the Top 100, all else equal. These large differences are plausibly attributable to the Newsweek rankings themselves, as our methods addressed general market influences, differences in industry and firm characteristics, and confounding information events, as well as more technical issues like information anticipation, event date clustering, and cross-sectional dependence.
While our key result fits into a large and growing scholarly literature on environmental information disclosure, the impact of Newsweek rankings on stock market outcomes was certainly not obvious at the outset. On one hand, the underlying data going into the rankings were already available to socially-responsible investors … so the information release might have been greeted with a collective yawn from Wall Street. On the other hand, the rankings were widely disseminated by a large ‘household name’ media organization in a carefully curated fashion …. so the information release might have had a large splash in the market. This latter result apparently won the day. One interpretation of the strong detected response is that investors continue to believe environmental performance remains important to stakeholders. Even if investors themselves were fully aware of all of the information in the rankings, they appeared to revise their expectations about companies’ opportunities and challenges as information potentially novel to other stakeholders was released. An alternative interpretation is that investors are not the rational wealth-maximizers MBA students learn about in Finance 101. Just like other stakeholders, investors may suffer from cognitive limitations that make easily digested information like the Newsweek rankings valuable to them.
A more speculative but more novel aspect of the paper explores how the environmental information affected market outcomes. We found that the format of the information mattered a great deal. Only the highly publicized and heuristically appealing overall ranking affected market outcomes. Components of the rankings – like environmental impact scores, green policy scores, and reputation scores – had no independent effect on market outcomes, even when conveying more innovative information than the composite score. The implication is that nuances in environmental information may not matter much for outcomes. We also found suggestive evidence that concerns about activist and regulatory pressures were more likely channels linking green rankings to market outcomes than concerns about consumer, business to business, and employee pressures. Our evidence was also not supportive of more direct channels like manager and investor preferences. We are cautious about over-interpreting our results on the channels through which disclosure operates. However, if future research in other settings continues to imply that environmental information particularly spurs activist and regulatory pressures, one implication is that transparency programs targeted towards NGOs and government oversight are especially likely to affect firms’ bottom lines and (eventually) their ‘greenness.’
Thomas P. Lyon is the Dow Chemical Professor of sustainable science, technology and commerce at the University of Michigan, where he holds positions in both the Ross School of Business and the School of Natural Resources and Environment.
Jay P. Shimshack is Associate Professor of public policy and economics at the University of Virginia, where he holds positions in the Frank Batten School of Leadership and Public Policy and the Department of Economics. This paper was written while Shimshack was a visiting scholar at University of Michigan’s Erb Institute for Global Sustainable Enterprise.