Greenwashing and misvaluation : evidence from the U.S. energy sector

Abstract

This thesis examines the relationship between environmental, social and governance (ESG) performance, carbon emissions and misvaluation in the U.S. energy sector over the period 2010–2023. A two-stage panel regression framework is employed for empirical analysis. The first stage involves estimating a firm’s intrinsic value based on fundamentals, with residuals capturing non-fundamental misvaluation. In the second stage regression, these residuals are regressed on ESG scores, carbon emissions and their interaction to test whether the market valuation premiums linked to ESG scores are conditional on environmental performance. The results show that higher ESG scores are positively and significantly associated with a rise in overvaluation, which indicates that ESG investors may assign a valuation premium to perceived sustainability. However, a negative and significant interaction term between ESG and carbon emissions suggests that these premiums diminish for high-emitting firms, consistent with a conditional credibility effect. To further analyze the relationship between ESG, emissions and misvaluation, the ESG variable was decomposed into its three pillars to identify the primary pillars constituting this valuation premium. The results of the decomposition analysis indicate that the environmental and social pillars of the ESG variable are the main drivers of valuation premiums, while the governance pillar showed no significance. The findings from this analysis were subsequently corroborated through further analysis, in particular, through alternative valuation measures based on EV/EBITDA. This thesis contributes to the literature by showing that environmental performance conditions the valuation premium assigned to ESG and provides evidence of potential greenwashing effects in capital markets.