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New research shows it pays to invest in environmental stocks

A study by Birkbeck’s Department of Management and the University of Sussex Business School shows that stocks in environmentally minded firms fare better than their polluting peers.

The stocks of environmentally-minded companies are a better bet for investors than shares in their polluting rivals, reveals a new study by Birkbeck’s Department of Management and the University of Sussex Business School.

Companies with better-than-average environment performance gave investors better returns and lower risk than their competitors, the study by Dr Panagiotis Tzouvanas and Professor Emmanouil Mamatzakis found.

The study found on average a portfolio with the best-performing environmental stocks could have up to 7% superior annual returns than a portfolio with highly polluting stocks, while the risk of environmental stocks is around 30% less.

An investor who put $100 in 2005 into a green minded company whose environmental performance was 10% above their industry standard every year would get around $45 more back on their investment in 2018 than if they backed a polluting company whose environmental performance was 10% below the sector average, the study authors explained.

The findings suggest investment in environmental stocks would improve the efficiency of financial markets and provide strong justification for investors to select environmental stocks.

The study is the first of its kind to examine the association between companies’ environmental performance and their risk-adjusted returns.

Dr Panagiotis Tzouvanas, Lecturer in Finance at the University of Sussex Business School, said: “Our study shows that it pays to invest in environmental stock and that it is justified from a portfolio selection point of view. The research also indicates, to a certain extent, that it is profitable for a firm to invest in clean technologies.”

The research found that environmental companies were the best performer in all industry-specific portfolios they examined with the largest gains to be found for green-minded companies in Consumer Discretionary, Energy, Financial and Health Care portfolios.

Businesses in environmentally sensitive industries such as the energy sector were the biggest beneficiaries of reducing their greenhouse gas emissions. An energy firm that decreased their pollution output by 10% would benefit from a 3% boost to their share price. On the other hand, firms operating in real estate or consumer staples received no share price increase from decreasing their emissions.

Emmanouil Mamatzakis, Professor of Finance in Birkbeck’s Department of Management, said: “Our findings reveal that the stocks of companies with strong environmental performance are value for money in the portfolio, while also contributing to the sustainability of the economy.

“Our findings justify the use of policy and regulation interventions that encourage and incentivise environmentally-responsible ’green’ investment.”

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