Ecoefficiency and Market Volatility in Emerging Countries Ecoefficiency and Market Volatility in Emerging Countries

In Latin America, the reduction of CO2 emissions implies the reduction of financial risk

Ecoefficiency and Market Volatility in Emerging Countries

Make no mistake: climate change and resource scarcity pose a threat to Earth and its inhabitants. There is evidence that CO2 emissions, generated by the use and consumption of fossil fuels, are the main cause of our planet’s accelerated overheating. At this point, the cost of doing nothing clearly exceeds the cost of the harmful effects of climate change and pollution.

Nowadays, industries and financial markets are playing a leading and participative role in solving this problem, but the approach employed by companies should focus on a commitment to the environment as well as their financial performance.

In this context, the eco-efficiency theory gains relevance, by maximizing the economic value of a productive unit while minimizing its environmental impact. Consequently, a company’s shareholders and stakeholders seek to minimize climate risks by establishing investment priorities and metrics to help them measure the economic benefit of environmentally friendly practices. Logically, the connection between environmental and financial performance has led to the demand for and disclosure of environmental information by investors, playing a crucial role in generating additional returns and reducing risk in financial markets.

In fact, many stock exchanges around the world have generated environmental responsibility initiatives which support green business models. On the other hand, emerging countries

have demonstrated their interest in the environment by incorporating factors associated with sustainability into their financial markets. In contrast to developed markets, such as Europe and the United States, emerging economies have created robust investment opportunities, drawing in capital flows from investors seeking attractive returns and to contribute to climate change prevention.

In addition, over the past few years, the creation of initiatives and public policies has been encouraged in order to respond to a better-informed public that demands green products and services and the promotion of environmental regulations. Eco-innovation is considered to be one of the pillars of sustainable growth promoted by OECD countries, and governments play a fundamental role in ensuring and triggering economic prosperity and environmental balance. Consequently, since economic efficiency and environmental efficiency go hand in hand, indicators that compare the evolution of these two aspects in industries and regions need to be implemented.

To date, few studies have analyzed the effect of eco-efficiency on the risk sensitivity of financial markets, especially in emerging countries. Thus, the main contribution of the paper “Eco-Efficiency and Stock Market Volatility: Emerging Markets Analysis” (Administrative Sciences, 2021), published together with my colleagues Esteban Pérez Calderón, from Universidad de Extremadura, and Martha del Pilar Rodríguez García, from Universidad Autónoma de Nuevo León, is to provide empirical evidence of the relationship between corporate eco-efficiency and the financial risk manifested in capital markets, considering the evolution of emerging markets.

Our research focused on analyzing 346 public companies selected from three emerging markets: Latin America, Europe and the Middle East, and Asia. This sample encompassed 24 emerging countries and the selection was made on the basis of the MSCI Emerging Markets Index.

The model presented in our research tests the theory of risk reduction associated with good behavior in greenhouse gas emissions, particularly CO2. This model includes the country effect and the effect of the polluting or “controversial” industries, which are defined as industries whose activities damage the environment or harm society in some way, such as the chemical industry, the gaming and betting sector, or the arms industry, among others.

Our model determines the changes in the risk variable, measured by share price volatility, based on the sensitivity of movements of the eco-efficiency variable measured through CO2 emissions per unit of sales. Leverage, return on assets, company size and CAPEX investment per unit of sales were used as control variables to determine the concentrated effect. Our model also measured the industry effect and the country effect.

The results of this research show evidence of a direct relationship between eco-efficiency and market risk, with a greater impact on high-risk companies, mainly in Asian countries where companies are penalized from a social and environmental responsibility perspective. What does the direct relationship between risk and eco-efficiency mean? It means that a reduction in CO2 emissions per unit of sale implies a reduction in risk. While this relationship was present in Latin America, the European and Middle Eastern countries did not show any evidence of the same.

Why is this research relevant?

First, given the scarcity of studies on eco-efficiency in emerging countries, our research provides empirical evidence of the theory of market risk reduction as a function of pollution level reduction in companies belonging to controversial sectors. Our model is applicable to companies in other financial markets that have eco-efficiency metrics. It should be noted that eco-efficiency is achieved through three objectives: increasing the value of products and services, optimizing the use of resources and reducing environmental impacts.

Second, volatility determined by share price variability as a measure of risk captures the sensitivity of asset investments, providing decisive elements for the incorporation of pollution reduction initiatives. In turn, this facilitates the implementation of strategies in companies that want to contribute to protecting the environment and be seen as a viable long-term investment vehicle.

Third, studying risk, the controversial effect and the country effect determines the following relationship: emerging economies, being in the initial stages of growth, tend to pollute more and this affects the volatility perceived by the markets. Emerging markets need to create public policies that focus on reducing damage to the environment, while generating business opportunities that guarantee economic growth and the well-being of the population.

The evolution of the corporate objectives of creating economic value and protecting natural resources has transformed the generation of environmental metrics, which measure the economic impact of companies. Investors recognize that good environmental performance is an important source of value since it increases long-term returns, improves or maintains market reputation, increases operational efficiency, drives product and service innovation processes, and maintains consumer and stakeholder loyalty in the community and markets.


Galindo-Manrique, Alicia & Perez-Calderon, Esteban & Rodríguez-García, Martha. (2021). Eco-Efficiency and Stock Market Volatility: Emerging Markets Analysis. Administrative Sciences. 11. 36. 10.3390/admsci11020036.

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