Drivers of Going Green in Financial Markets and Corporate Networks

Abstract: This dissertation is a collection of three self-contained empirical papers developing the knowledge on environmental responsibility of investors and corporations.The first paper investigates how corporate environmental performance propagates in firm networks. We find that the degree of spillover depends on the type of link between firms as well as their relative strength in the network. The effect is strongest among competitors especially in industries that are highly concentrated, consumer-facing and for which environmental risks are material. Importantly, we find that network propagation results in improvements of environmental performance - the effect on the focal firm is stronger when the related firm improves its environmental score and if the focal firm’s own score is low. Finally, changes in aggregate environmental performance entail changes in both declared policies and real activities, such as CO2 emissions.The second paper addresses the channels through which incorporating information on firms’ environmental performance affects investors’ portfolio performance. We segregate the investors into an aware group, who incorporate environment information in their estimation of risk and expected return, and an unaware group, who only maximize their unconditional mean–variance utility. In a country wise comparison of portfolio performance between the two groups, we find that the investors’ demand pressure is the most relevant explanatory factor for cross-country differences in portfolio performance. The results show that in countries with higher demand for environmentally friendly stocks, overpricing of these stocks leads to a lower portfolio performance for aware investors.The third paper studies whether public environmental awareness affects investors’ demand for environmentally friendly stocks and the financial market valuation of those stocks. We propose a novel measure of environmental activism. Further, we use Internet search intensity as a proxy for the attention paid to climate change and the climate change social movement. The results show that in countries in which a higher proportion of the younger generation participated in the strike, environmentally friendly stocks were demanded more and valued higher both in that year and during the previous five years. Specifically, in a cross-country analysis, interacting the activism proxy and environmental score yields significantly positive coefficients. We provide evidence that including country characteristics in factor-based asset pricing models mitigates mispricing in the environmental score portfolio.

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