Environmental externality valuation: a timeline to financial materiality

Environmental policy regulating the greenhouse gas emissions of public companies is likely to become more prevalent in the coming years. Therefore, it is essential for public companies and investors alike to understand how the implementation of environmental policy will affect the valuation of public companies moving forward. Such an understanding improves decision-making and capital allocation planning from both a company and investor perspective. This study analyzes the financial materiality of greenhouse gas emissions in relation to environmental regulations passed in South Korea by performing a regression analysis of total or estimated greenhouse gas emissions, scaled by sales to allow for comparability across firms of different sizes, and the market valuation of South Korean Public companies. I find that emissions become financially material only after official emission allocations for public companies are set by the South Korean Government.