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The financial reward for environmental performance in the energy sector

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  • Arslan-Ayaydin, Özgür
  • Thewissen, James

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.
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Suggested Citation

  • Arslan-Ayaydin, Özgür & Thewissen, James, 2016. "The financial reward for environmental performance in the energy sector," LIDAM Reprints LFIN 2016001, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2016001
    Note: In : Energy & Environment, Vol. 27, no. 3-4, p. 389-413 (2016)
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    2. Wei Xu & Yuchen Pan & Wenting Chen & Hongyong Fu, 2019. "Forecasting Corporate Failure in the Chinese Energy Sector: A Novel Integrated Model of Deep Learning and Support Vector Machine," Energies, MDPI, vol. 12(12), pages 1-20, June.
    3. Gargallo, Pilar & Lample, Luis & Miguel, Jesús A. & Salvador, Manuel, 2024. "Sequential management of energy and low-carbon portfolios," Research in International Business and Finance, Elsevier, vol. 69(C).
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    5. 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.
    6. Siew − Peng Lee, 2021. "Environmental responsibility, CEO power and financial performance in the energy sector," Review of Managerial Science, Springer, vol. 15(8), pages 2407-2426, November.
    7. Siew Peng Lee & Mansor Isa, 2024. "Corporate sustainability practices and financial performance: The moderating role of corporate controversies and Shariah screening," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(4), pages 3651-3667, July.
    8. Sebastian Klaudiusz Tomczak & Anna Skowrońska-Szmer & Jan Jakub Szczygielski, 2020. "Is Investing in Companies Manufacturing Solar Components a Lucrative Business? A Decision Tree Based Analysis," Energies, MDPI, vol. 13(2), pages 1-27, January.
    9. Loredana-Georgia Nițu (Ivan), 2023. "The environmental and financial performances on the energy sector. Case study in North America," Journal of Financial Studies, Institute of Financial Studies, vol. 14(8), pages 151-165, June.
    10. Yujing Gong & Cheng Yan & Kung‐Cheng Ho, 2021. "The effect of managerial ability on corporate social responsibility and firm value in the energy industry," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(2), pages 581-594, March.
    11. Silvana Secinaro & Valerio Brescia & Davide Calandra & Buerhan Saiti, 2020. "Impact of climate change mitigation policies on corporate financial performance: Evidence‐based on European publicly listed firms," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(6), pages 2491-2501, November.
    12. Liang, Ting & Zhang, Yue-Jun & Qiang, Wei, 2022. "Does technological innovation benefit energy firms’ environmental performance? The moderating effect of government subsidies and media coverage," Technological Forecasting and Social Change, Elsevier, vol. 180(C).
    13. 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.
    14. Stanley YB Huang, 2024. "How can corporate social responsibility predict voluntary pro-environmental behaviors?," Energy & Environment, , vol. 35(7), pages 3386-3398, November.
    15. 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).
    16. 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.
    17. repec:fst:rfsisf:v:8:y:2023:i:special-june_2023:p:151-165 is not listed on IDEAS
    18. 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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