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The financial reward for environmental performance in the energy sector

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  • Özgür Arslan-Ayaydin
  • James Thewissen

Abstract

This article studies the financial reward for environmental performance of firms in the energy sector. Because of their substantial impact on environment, energy sector firms convey a particular status in the environmental–financial performance question, as compared with firms outside this sector. We use the environmental scores compiled by Kinder, Lyndenberg, and Domini Research and Analytics to construct two portfolios that differ in their environmental performance. We find that, between 2000 and 2011, energy sector firms with good environmental performance financially outperform energy sector firms with poor environmental performance. A portfolio strategy with a long (short) position in energy sector firms with good (poor) environmental performance generates an annual abnormal return of 9.624% after correcting for market, size, book-to-market and momentum risks. For firms outside the energy sector, the performance of the two portfolios is statistically insignificant. Using the VIX index, we also show that the market does not reward environmental performance of energy sector firms in periods of high financial uncertainty.

Suggested Citation

  • Özgür Arslan-Ayaydin & James Thewissen, 2016. "The financial reward for environmental performance in the energy sector," Energy & Environment, , vol. 27(3-4), pages 389-413, May.
    • Handle: RePEc:sae:engenv:v:27:y:2016:i:3-4:p:389-413
    DOI: 10.1177/0958305X15627547
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    12. Gargallo, Pilar & Lample, Luis & Miguel, Jesús & Salvador, Manuel, 2022. "Dynamic comparison of portfolio risk: Clean vs dirty energy," Finance Research Letters, Elsevier, vol. 47(PA).
    13. Sebastian Klaudiusz Tomczak, 2019. "Comparison of the Financial Standing of Companies Generating Electricity from Renewable Sources and Fossil Fuels: A New Hybrid Approach," Energies, MDPI, vol. 12(20), pages 1-20, October.
    14. Rui Dias & Nicole Horta & Mariana Chambino, 2023. "Clean Energy Action Index Efficiency: An Analysis in Global Uncertainty Contexts," Energies, MDPI, vol. 16(9), pages 1-18, May.
    15. Doumpos, Michalis & Andriosopoulos, Kostas & Galariotis, Emilios & Makridou, Georgia & Zopounidis, Constantin, 2017. "Corporate failure prediction in the European energy sector: A multicriteria approach and the effect of country characteristics," European Journal of Operational Research, Elsevier, vol. 262(1), pages 347-360.
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    17. Qiang Li & Wenjuan Ruan & Tiantian Sun & Erwei Xiang, 2020. "Corporate governance and corporate environmental investments: Evidence from China," Energy & Environment, , vol. 31(6), pages 923-942, September.

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