Does Pollution Make Us Invest More Sustainably? An Investigation of the Relationship Between New York City’s Pollution Levels and Investments in Sustainable Businesses

Joanna Sidsel Gamstrup Nørholm & Camilla Eleonora Westergaard

Studenteropgave: Kandidatafhandlinger


The purpose of this study is to investigate how ambient air pollutants in New York City affect investor behaviour, and what the impact on investments in sustainable businesses is. This is done through the construction of four hypotheses utilising ordinary least squares regressions on daily pollution levels, daily stock returns and daily trade activity on S&P 500 companies in the period from January 1st, 2013 through December 31st, 2018. A sensitivity analysis including high versus low ESG portfolios were further constructed to determine potential differences in effects. Firstly, a connection between air pollutants and the stock market was established through the NYSE Composite Index, discovering a negative correlation on return with effects delayed by two days. Secondly, the relationship was further studied with the inclusion of ESG scores as a sustainability measure for S&P 500 companies. The conclusion was that ESG scores, given the presence of air pollution, is positively correlated with the stock market. This means that an increase in the ESG score would positively affect the expected return. Therefore, contradicting the discussed theory by Merton, arguing that recognition, measured by information, is negatively correlated with a stock’s return. The third part of the analysis studied the different component of the ESG score; environmental, social and governance. This analysis did not prove any significant relationships between these individual scores and stock market returns. Hence, indicating that ESG scores are more used as a comparative measure and not to gain in-depth understanding of a company’s ethical profile. The environmental score did however show some significance in high-minus-low ESG portfolios, indicating that this parameter is an intuitive investment choice due to air pollution, compared to social or governance scores. Lastly, a division into sectors was the foundation for the last part of the analysis. The goal was to determine if some sectors were more heavily invested in during high air pollution. Results proved not to be statistically significant, therefore it is not possible to conclude differences in investments across and within sectors on S&P 500. This study thereby concludes a negative delayed effect on stock market returns arising from ambient air pollution. Furthermore, a positive relationship between ESG scores and stock market returns, given the presence of ambient air pollution, is established. This indicates that high pollution leads to investment in sustainable companies. When utilising the ESG score as a tool for comparison, this seems to create more value to the investor, relative to the score in itself.

UddannelserCand.merc.aef Applied Economics and Finance, (Kandidatuddannelse) Afsluttende afhandling
Antal sider141
VejledereLinda Sandris Larsen