(Australian Associated Press)
The size of a company’s carbon footprint has an identifiable – and negative – impact on its share price, a study by global asset manager AXA Investment Managers has found.
The study found that investors consistently implied a negative impact on share price due to the carbon dioxide output from a company, similar to other expenses.
Analysis by AXA IM’s quantitative equities manager Rosenberg Equities examined share prices of companies in relation to their carbon footprint to determine any contribution that investors assign to carbon.
‘The carbon considerations are baked into investors’ assessments. So, they expect to pay less for that company over time,” Rosenberg Equities’ director of investment strategy Kathryn McDonald said.
“This means that, all else being equal, a company’s valuations would be lower if its carbon footprint is higher.”
Investors appear to be already implicitly treating carbon as an expense, when it is modelled as an expense item, according to the analysis.
“When we think about carbon, we can think about it as something companies can spend in pursuit of revenue,” Ms McDonald said.
“So, it can be thought of as part of their regular operating process, similar to a normal expense.”
The research was based on carbon data disclosures reported annually by US and Canadian companies over a roughly 10-year period ending May 2016.
The data relates to greenhouse gas emissions generated from burning fossil fuels and production processes owned or controlled by the company, plus emissions by its direct suppliers.
The analysis found that, over the entire period, the implied price for a tonne of carbon was about $10 on average, but varied at different points, reflecting changing investor sentiment.
The valuation was primarily skewed by three sectors – utilities, energy and materials.
Ms McDonald said the results of the study highlight that current methods of valuing the potential negative risk related to greenhouse gas emissions may be insufficient, as they miss the effect on share price.
Accounting for carbon as a line item in a company’s income statement allows investors to see the additional impact from carbon, she said.
This would imply that investors should give a ‘haircut’ to current valuations for companies with a big carbon footprint – such as coal producers.