Applying a portfolio approach, this paper investigates the financial importance of voluntarily disclosing climate commitments and independent expert validated action plans.

Abstract

While a growing body of research analyzes how the considerable increase in the intensity and frequency of extreme weather and the failure to mitigate climate change causes major risks and damages to the economy, we study whether investors value that companies have set climate targets in line with science based goals. Investors are likely to be concerned about how tomorrow’s market barriers, policy instruments and other conditions linked to climate actions will affect returns. Applying a portfolio approach, our paper investigates the financial importance of voluntarily disclosing climate commitments and independent expert validated action plans.

Building portfolios of 1,518 firms from 13 industries in 60 countries observed during 1,482 trading days between 2017-2022, we perform coarsened exact matching to create portfolios of stocks otherwise similar to firms that have set science-based (SBTi) emission targets in line with the goals of the Paris Agreement. Applying a five-factor Fama-French model, the results show a positive and statistically significant larger risk-adjusted excess returns for the target portfolio.