Sophie van Doeveren (S2489805), Executive Summary, Master Thesis International Financial Management.
Shareholder’s value, Environment and Energy enterprises in Europe
Climate Change causes a global movement of governments laws and regulations. Part of the changes in legislation are focused on reducing the negative impact of enterprises on the environment. These legislations include reducing the pollution and investing in sustainable resources. The countries of the European Union (“EU”) were the first to put a cap on emissions and implement the (first) Emissions Trading System (ETS), which allows enterprises to trade its emission allowance. This cap will be lowered by 21 percent in 2020 and by 43 percent 2030 compared to 2005 to reduce the enterprises’ strain on the environment. Furthermore, the EU set targets to increase the renewable energy sources relative to other sources. To ensure the continuity and growth of an enterprise in these conditions investors and managers should understand the influence of the environmental measures on the shareholder’s value (Lee et al, 2015 and Clarkson et al, 2004). In this thesis carbon emissions and environmental R&D expenditures are considered as proxies for the environment. Shareholder’s value is defined as Tobin’s Q and as a robustness check market capitalization.
Currently, there is lack of research on the relation between the EU, the environment and shareholder’s value. The aim of this thesis is to contribute to reducing this gap by examining the influence of environment on the shareholder’s value of enterprises in the EU. The time period chosen is from 2006 to 2016. The statistical approach are panel regressions with fixed effects.
The first proxy of environment (carbon emissions) has a positive relation with shareholder’s value. However, if the enterprise is located in West Europe or operating in the non-renewable energy sector the carbon emissions have a more negative relation with shareholder’s value compared to East Europe or renewable energy sector. This is in accordance with the literature (Graham et al., 2001, Lee et al., 2015, Konar & Cohen, 2001). An explanation is the carbon costs which are costs enterprises make for carbon emissions, including buying emissions allowances.
These carbon costs will become more expensive in the future as the ETS cap will be lowered. In addition, the countries with a large non-renewable energy sector are associated with higher emissions. The enterprises in these countries have higher carbon costs, which results in a lower shareholder’s value. Furthermore, Sanzillo et al. (2018) indicated that a non-renewable energy sector (with fossil fuels) underperformed identical stocks (without fossil fuels) between 2013 to 2018. This would indicate that enterprises associated with fossil fuels have a lower shareholder’s value. In 2016 the non-renewable energy sector is larger than the renewable energy sector.
However, Kazemilari et al. (2017) showed that the renewable energy sector is growing both in size
Sophie van Doeveren (S2489805), Executive Summary, Master Thesis International Financial Management.
Shareholder’s value, Environment and Energy enterprises in Europe
and importance in the world economy and hence becoming more valuable. It results in an increase of the shareholder’s value in this sector. The conclusion is that managers need to lower the carbon emissions as it will reduce shareholder’s value and carbon emission will become increasingly more expensive and the renewable energy sector will become more important than the non-renewable energy sector.
The second proxy of environment (environmental R&D expenditures) has a negative and a positive relation to the shareholder’s value depending on the model. In such a model the positive relationship appears when these environmental R&D expenditures will allow the enterprise to grow and increase shareholder’s value on the long-term. (Boer, 1994). However, if the environmental R&D expenditures occur in a country not meeting the renewable energy target the relationship with shareholder’s value is negative. In another model the relation of environmental R&D expenditures and shareholder’s value is negative. The environmental R&D expenditures in this case are seen as sunk costs as shareholders do not benefit immediately from the environmental R&D expenditures and these are taken from the distributable profits (Boer, 1994). However, the shareholder’s value is positive if the environmental R&D expenditures are made in the non-renewable energy sector.
This leads to the conclusion that managers need to carefully consider the environmental R&D expenditures, as it can lower the shareholder’s value, but ensure long-term growth. In addition, the non-renewable energy sector can spend the environmental R&D expenditures more easily as shareholder’s value grows in this relation.
The conclusions of this thesis are based on significant statistics. Still more research is required. The time frame of this thesis is until 2016, which is four years before the hard deadline of renewable energy sources target of 2020. Consequently, it is recommended to see if the conclusions of this thesis are still valid after this deadline. Furthermore, Miyajima & Kuroki (2008) and Lee et al. (2015) indicate that there is a relation between ownership type and shareholder’s value. In this thesis there was no data available regarding the ownership variable. Hence, this variable could not be considered. Another recommendation is to look at the influence per ETS stage, as it can show the extent of the emission cap’s influence on shareholder’s value. To ensure a smooth transition the implementation of the ETS occurs gradually in four stages to enterprises.
