The growing power of green in the stock market of the environment

If you have spent any time in the stock market, you’re familiar with ‘support’ and ‘resistance.’
The two terms explain when a stock price cannot break upwards past a certain point, resistance, or can’t drop below a certain point, support, due to supply and demand.
For example, if you believe the value of an equity is between $20 and $25, you will buy if it drops to $20 and sell if it hits $25. When enough investors simultaneously agree on its range, we see support and resistance as limit and stop orders get executed.
The perceived financial value of a company engaging in climate change initiatives is similar.
There is a benefit to positioning a firm towards a greener future, but there’s also a limit to what a firm can reasonably achieve.
Earlier this year, Arjuna Capital was sued by Exxon Mobile after they submitted a shareholder proposal to address the company’s lack of motivation in addressing climate change.
Like what you would see in the stock market, the metaphorical price of climate engagement pushed its limits, bounced off the resistance, and took a tumble. Arjuna Capital “promised” Exxon Mobile that it would not present any more proposals that would push the oil giant to address planet-warming emissions. As a result, a Texas judge recently declared the lawsuit “moot.”
With the oil giant signaling that it would treat other shareholder proposals the same way, it reignites a popular question in the environmental, social, and governance (ESG) community: how proactive does a company need to be on climate change to maximize shareholder value, and what is the financial impact of that on a specific company? 
The answer is not clear cut. For example, it makes sense for any company to reduce their energy consumption because they would be paying less for energy. But what if you sell that energy like Exxon?
The pressure on Exxon to spend money pursuing climate change initiatives could be considered double jeopardy. The company is being asked to decrease their climate impact while watching their demand shrink through the same sentiment. Any rational investor would not suggest that the company shut down operations to be greener, even if their product is a major driver of greenhouse gas emissions. And it’s clear from the lawsuit that Exxon has no intention to do so. The board has made an internal decision to “resist.”
And Exxon’s lawsuit does not change the social pressure being applied to them with the shareholder proposal just the first bounce on the ESG ceiling. As the belief in climate change cements itself in the minds of consumers and investors, the lack of interest for investing in polluting companies will grow. 
This will present in two ways: a decrease in product demand and a decrease in the willingness to fund these companies and with it a higher cost of equity and debt.
The product demand has already demonstrated itself to be a powerful managerial driver. Tesla sits at a higher valuation than all the traditional auto manufacturers, including Toyota and GM and electric vehicles are increasing their market share every year.
In 2022, three per cent of all vehicle registrations were electric, compared to 1.8 per cent in 2020. Manufacturers are now heavily investing in EVs and hybrids which, in markets such as China, is already driving down prices and dramatically increasing the range EVs go on a single charge, making them more appealing to consumers.
For polluting companies seeking funding, there is evidence that the market is discounting their future cash flows.
Research suggests that companies who rate well on their exposure to ESG risks benefit from a reduced cost of equity and debt.  While 2023 saw the first cash outflow from sustainable funds in recent history, it does not erase the previous 10 years of growth.
In my experience these fund structures are not driven by a long horizon — rather asset managers are realizing that the appetite for sustainable investments is growing with the population. Legislation, as well as pressure from their beneficiaries, may force pension funds to meet certain environmental measures and they will have no choice but to diverge.
As the market starts to realize the decreased demand for ownership in polluting firms, the stock price will drop and with it their ability to fund growth through equity or debt.
Companies such as Exxon are no longer considered sexy by both consumers and investors, and it’s not only the oil and gas industry which should be concerned.
Firms in every sector who do not adapt will be left behind. 
Isaac Tate is a MBA student at the University of Toronto’s Rotman School of Management.