The value relevance of the environmental impact of firms: Evidence on data provided by the impact-weighted accounts initiative

Abstract

In the absence of sophisticated and clearly defined ESG metrics, companies’ positive and negative impacts on the planet are likely to be absent from decisionmaking. To provide accurate signals for business leaders and investors, and to allow firms to internally generate company impact data, rather than using external rating agencies, company impact should be connected to the financial statement. Impact-weighted accounts are a line on the financial statement, such as the income statement or the balance sheet, to supplement the financial health and financial performance by reflecting companies’ positive and negative impacts on the customers, employees, environment, and overall society. The idea of impact-weighted accounts is based on a project from Harvard Business School. Their mission is to drive the creation of financial accounts that reflect companies’ financial, social, and environmental performance. This thesis investigates the value relevance of the environmental impact, measured by impact-weighted accounts, of selected firms from 2010 to 2019. Using various types of regression models, we find robust evidence of a positive, statistically significant coefficient on environmental impact. Therefore, our results suggest that firms’ environmental impacts are associated with their stock price and Tobin’s Q, respectively. In addition, these relations are more pronounced for stock prices and Tobin’s Q during the second half of our sample period. Overall, these results suggest that the environmental impacts of firms, measured by their impact-weighted accounts, are relevant to their values.