Local pollutants and carbon emissions matter

Environmental concerns have become increasingly important drivers of investor behavior, and a range of indices seek to guide this investment by tracking company performance on each dimension of sustainability.
Local pollutants are dwarfed in volume by carbon emissions, but their high health risks per tonne make them significant components of many companies’ environmental damage.
A multi-pollutant index of environmental performance incorporates information that a measure focusing solely on greenhouse gas emissions may miss.

While investors’ attention often focuses on carbon emissions, local pollutants are also significant elements of environmental damage for many companies.

Environmental, social and governance (ESG) concerns have become increasingly important drivers of investor behavior, and a series of indices seek to guide this investment by tracking company performance on each dimension of sustainability. Measurements of corporate carbon emissions are often cited in this context. In Measuring Firm Environmental Performance to Inform Asset Management and Standardized Disclosure (NBER Working Paper 29454), Nicholas Z. Muller finds that metrics that incorporate company emissions of local pollutants as well as carbon dioxide (CO2) provide a more accurate assessment of the environment. impacts and also have greater predictive power for financial results.

Muller defines an environmental performance index based on the total pollution damage caused by companies through eight pollutants: three greenhouse gases – CO2, methane and nitrous oxide – and five local air pollutants – fine particles, carbon dioxide. sulfur, nitrogen oxides, volatile organic compounds, and ammonia. Local pollutants are dwarfed in volume by carbon emissions, but their high health risks per tonne make them significant components of many companies’ environmental damage.

It then estimates this index for U.S. utilities using facility-level emissions data collected by the Environmental Protection Agency in 2014 and 2017. To calculate the companies’ total pollution damage, it calculates first the impacts of each pollutant on health and well-being in dollars. For greenhouse gases, these damages are equal to the social cost of carbon multiplied by corporate carbon emissions. For local air pollutants, emission damage is estimated using an integrated assessment model that translates emission data into county-level pollution concentrations, converts these concentrations into excess mortality at the using epidemiological dose-response functions, and then valuing excess deaths using willingness-to-pay estimates. for reducing the risk of mortality.

Finally, Muller converts firm-specific pollution damage into a relative pollution intensity index by dividing each utility’s share of the industry’s total pollution damage by its share of the industry’s total market capitalization. ‘industry. In 2014, this metric ranged from 0.06 for American Water Works – its industrial pollution damage share was less than a tenth of its share of industry market capitalization – to 5.81 for NRG Energy, a company whose share of pollution damage was about six times higher. than its share of the market value.

More than 50% of countries have established national ambient air quality standards, but we need to do more to protect people and our planet.

At COP26, the World Economic Forum and the Clean Air Fund launched the world’s first private sector initiative to tackle air pollution.

Image: Jane Burston/World Economic Forum

Founding members of the Alliance for Clean Air are committed to measuring and reducing their air pollution emissions, creating healthier communities around the world.

Members of the Alliance for Clean Air:

Establish air pollution footprints on nitrogen oxides, sulfur oxides and particulates within 12 months
Identify where they are emitted to track human exposure
Set ambitious targets and goals to reduce air pollutant emissions, with a clear action plan
Act as air quality champions by educating employees, customers and communities about the impact of air pollution. They will also help them reduce their exposure and support them to take action to reduce pollution
Use their strengths in innovative ways to accelerate clean air solutions

Also at COP26, a practical guide for businesses on how to measure air pollution across value chains is presented by the Climate and Clean Air Coalition and the Stockholm Environment Institute, in cooperation with IKEA. The guide will help businesses understand their impact on air quality and take the necessary steps to reduce their emissions.

If your company is committed to improving air quality, contact us to express your interest in working with us.

The eight-pollutant index reveals trends in the overall environmental impacts of utilities that a focus on greenhouse gases alone would not capture. Muller calculates that total utility pollution damage decreased by about 20% per year between 2014 and 2017, almost entirely due to declining damage from local pollutants. Carbon emissions have remained stable over this period.

In addition to providing a more comprehensive picture of corporate environmental damage, the eight pollutant score is also more predictive of corporate financial performance over the 2014-2017 period than the carbon metric alone.

Muller finds that between 2014 and 2017, companies that became more polluting experienced a decline in their stock prices. A one unit increase in the value of the eight pollutant index is associated with an 8.6% decline in the stock price. In comparison, when studied in isolation, a one unit increase in the carbon emission index was associated with a 5.0% decrease. Focusing solely on the latter would therefore underestimate the impact of firm-level environmental damage on prices.

The eight pollutant score is also a better predictor of other investment outcomes. For example, companies that increased in pollution intensity between 2014 and 2017 saw larger year-over-year gains in earnings per share (EPS), and they also saw higher earnings surprises – the deviations between analyst earnings forecasts and actual earnings. The eight-pollutant performance metric again predicts future EPS and EPS surprises better than an index based solely on greenhouse gas emissions would.

These stronger financial correlations suggest that a multi-pollutant index of environmental performance incorporates information that a measure focusing solely on greenhouse gas emissions may miss.