Can investing in the S&P 500 firms be consistent with investing in environmental sustainability?

The research in this paper examines the question of whether economic growth is consistent with environmental sustainability. Since growth is closely associated with capital accumulation, this question is studied by analyzing the allocation of capital expenditures. The analytical framework employed is based on the idea that the accumulation of capital is related to how investors value the capital in various firms, based on a number of factors, including the environment. While a number of environmental measures are available, I focus on greenhouse gas emissions (GHG). The relationship of GHG to the allocation of capital expenditures is explored using the Standard and Poor's (S&P) 500 firms. In addition to their being representative of the industry composition of the U.S. economy, these firms comprise the bulk of many investors’ portfolios and they undertake a significant fraction of capital spending in the U.S. economy. Trading positions in these companies directly or indirectly account for about 20 percent of all assets under professional management in the U.S. More importantly, but not surprisingly, is the fact that these same companies undertake about 50 percent of all U.S. capital expenditures.

The panel data fixed effect estimation method is applied to data from Compustat and Bloomberg for S&P 500 firms. The results show that, relative to those in the “clean” sectors, firms in the “polluting” sectors see their share of capital expenditures diminish when their share of GHG emissions increases. Specifically, if a firm in the “polluting” sector experiences an increase of 10 percent in its GHG share, its share of capital expenditures would be reduced by about 5 percent, when compared to a firm in the “clean” sector. Another way of looking at this is that if a “polluting” firm somehow becomes a “clean” firm, its share of capital expenditures would go up. An important economic insight from this research is that market-based capital accumulation and economic growth may not be inconsistent with environmental sustainability.

KEYWORDS: Capital expenditures; economic growth; environmental sustainability; greenhouse gas emissions; S&P 500