Has the recent increased focus on ESG changed how stocks are valued in the U.S.?
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Abstract
This study examines whether the Paris Agreement has influenced how ESG variables affect stock market valuation in the U.S. For this analysis, we use a modified Ohlson valuation model, which includes accounting variables and non-financial information, to measure value relevance. When performing the regression analysis, book value per share and earnings per share are the explanatory variables for the cum dividend market value as well as the combined ESG score of companies and their respective individual ESG pillars. The regression results show that ESG variables negatively impacted market valuation in the U.S. before adopting the Paris Agreement. However, the trend has reversed, as a high ESG score now increases company valuation. This implies that investors’ mindset has changed from a short-term to a long-term vision, which can be attributed to the influence of the Paris Agreement and its emphasis on long-term sustainability.
For robustness purposes of this result, we conduct industry analyses. Our results indicate that the energy, consumer cyclical, healthcare, and technology sectors exhibited negative coefficients before the agreement. The sign change of these coefficients following the agreement suggests increased investor interest towards the value creation potential within these industries through high ESG performance. This shift can be attributed to the notable emphasis placed on sustainability programs, reporting, and technological advancements to promote green energy. Similarly, after the adoption of the agreement, we found a positive and significant coefficient for all sectors, except in the academic and consumer non-cyclical sectors.
As the U.S. results can be driven by their way of doing business, i.e., “U.S. business culture”, we perform a further analysis to identify significant differences between the U.S. and Europe. The results demonstrate a significant positive influence of ESG variables on stock prices in the European market before and after the inclusion of the Paris Agreement. Nevertheless, there is a difference in the moderating effect of the agreement when comparing the U.S. and Europe. The agreement’s impact on stock market valuation in the U.S. is approximately twice as high as in Europe. This difference can be attributed to variations in business culture between the two regions, influencing how companies and investors respond to the goals and requirements set by the Paris Agreement.