Ms. Zeng, how does the tool work that you and your colleagues developed?
Jing Zeng: To build our measure, we used the stock price reactions around United Nations’
climate conferences covering a period of 30 years. The idea behind it: When major climate
policy news arrives, investors reprice firms’ stocks according to how the news affects their future
profitability. The price reactions reveal which firms are considered “green” and which are not.
Based on this insight, we constructed a measure of “greenness” for around 36,000 firms in over
90 countries. Compared to other existing measures, our coverage is far broader and includes
smaller publicly traded firms that publish no emissions data and have no ESG scores.
What advantages does the new measure offer?
Jing Zeng: Our measure capitalizes on the market’s unique ability to aggregate dispersed
information from financial market participants regarding both the present and the future. Our
tool is thus forward-looking: indeed, firms rated as “green” turn out to emit lower carbon
compared to those rated “brown” up to four years ahead. The method we propose also captures
both direct and indirect climate risks embedded in a firm’s value chain. Finally, we believe that
our measure is less prone to green-washing, to the extent that market participants scrutinize a
firm’s actions and price in only the genuine attempts to shift the firm’s climate impact.
Who could benefit from using the new measure in the future?
Jing Zeng: We see our measure as a new source of information for investors, regulators, and
policymakers seeking to assess firms’ “greenness” more comprehensively. Investors can use it to
evaluate the climate-risk exposure of their portfolios, especially for investments outside of the
US and Europe, where emissions data and ESG scores are scarce.
Regulators can make use of a consistent, globally comparable measure that does not depend on
what firms choose to report about themselves. Policymakers may use the country- and sector
level information to monitor whether climate commitments are seen as credible by financial
market participants.
For researchers, we also provide a freely available dataset for studying the green transition on
the companion website of our discussion paper:
https://sites.google.com/view/market-based-green-firms.