Measuring Firm Environmental Performance to Inform ESG Investing

Investing according to environmental, social, and governance criteria is gaining momentum. Most environmental performance indices focus only on the tonnage of carbon dioxide (CO2) emissions. This paper proposes a new monetary index covering eight pollutants. Inclusion of multiple pollutants reflects a broader range of risks. In the U.S. utility sector from 2014 to 2017, indices which only track CO2 mischaracterize firms’ environmental performance and underestimate its effect on financial outcomes relative to the multipollutant index. Analysts’ earnings forecasts for dirtier firms systematically undershoot actuals. The multipollutant index suggests new financial management strategies relative to those based on carbon intensity.