Do Markets Reward Green Investing?

Abstract: This master essay provides an elaborate study of the relationship between the environmental and the financial performance of corporations with focus on the European market. It aims to identify the nature and significance of this relationship, using a sample that is taken from different business sectors across 17 European countries over the seven-year period from January 2010 to December 2016. The analysis is based on a database of four environmental indicators-criteria chosen to rank and distinguish the 171 studied firms according to their environmental performance, combined with a data-set of financial stock returns and accounting data. Two types of econometric analyses are performed in this study, each addressing the same relationship of interest, but in a different manner: a two-step cross sectional analysis of the individual monthly stock returns, where environmental performance is reflected in explanatory variables for stock returns, and a portfolio analysis where portfolios with constituents of different environmental performance are constructed and compared. The results from the first analysis suggest that there is a positive influence of the environmental performance of the industry within which European enterprises operate on their financial performance, while the results extracted from the second analysis show significant positive performance only for portfolios constructed based on the environmental performance of firms, regardless industry.