Carbon intensity and market pricing: An asymmetric valuation

Abstract

We explore the extent to which differences in carbon intensity play a role in firms' market valuation. Our findings reveal that lower carbon intensity is associated with higher market valuation across all industries. Notably, our within-industry analysis unveils an asymmetrical valuation effect when comparing firms with carbon intensity below and above their industry averages: investors reward the former more for the same marginal reduction in carbon intensity, relative to the latter. Overall, this implies that firms with outstanding environmental performance raise investors' expectations that other firms in the same industry could reach an equally as good carbon intensity. The relative environmental performance deficit is penalised by the market.