Relevance to Investors of Greenhouse Gas Methane Emissions

While much evidence identifies the human and environmental impacts of excessive methane gas (CH4) emissions, climate scientists and world bodies have yet to explore whether financial markets price these impacts. Financial markets play a crucial role in reducing global warming because investors can penalize emitter firms today as a reduction in market value for the costs of their future emissions.

Using firm-level data on industrial CH4 and CO2 emissions mandatorily reported to the U.S. Environmental Protection Agency (EPA), we document five key findings. First, the equity market penalizes firms for high levels of CH4 by imposing a share price discount that is at least six times higher than the share price discount for CO2. Second, this discrepancy arguably reflects investors’ use of a higher global warming factor for CH4 than the one used by the EPA. Third, the CH4 valuation discount is largely driven by industry-level rather than firm-specific emissions. Fourth, the market penalty is stronger for firms in Blue states, those with limited CH4 disclosure in 10-K filings, and those with limited media mentions, suggesting that investor response is more severe when climate regulation is stricter and disclosure transparency weaker. Fifth, we examined two disclosure regulations: (i) firms located in states supporting the 2016 EPA methane regulations to reduce emissions faced a sharper market penalty after the rules were later overturned by a federal court; (ii) firms headquartered in states required to disclose harmful chemicals used in hydraulic fracturing experienced a smaller market penalty.